The S&P 500 posted its
biggest quarterly gain since the end of 2015, as a brightening economic outlook
offset investors’ waning enthusiasm for the “Trump trade.”
The index’s 5.5% rise in the
first three months of the year extended post-election gains that have sent
major U.S. indexes to records, but the most recent move higher reflects a
change in the bets that are fueling the rally.
Investors dialed back on shares
expected to benefit from changing U.S. policy following the presidential
election and piled into technology companies, wagering that a stronger economy
would amplify their growth potential.
The tech sector in the S&P
500 jumped 12% in the first three months of the year, by far the best performer
out of the 11 sectors in the index. The tech-oriented Nasdaq Composite Index
ended the quarter up 9.8%, its best quarter since 2013.
During this shift, stocks have
remained calm and pullbacks have been relatively minor, highlighting the
continued strength of the eight-year bull market. The CBOE Volatility Index,
known as Wall Street’s “fear gauge,” posted its second-lowest quarterly average
on record. The average daily percentage change for the Dow Jones Industrial
Average during the quarter was the lowest since 1965.
“The market’s been resilient
because the data has been reasonably solid,” said Joseph Amato, chief
investment officer of equities at asset manager Neuberger Berman. While there
has been “noise and bluster” coming out of Washington, economic data have been
getting better and confidence indicators are strong, he said. That all supports
the market’s climb.
But the rally’s leaders have
changed. Investors have been pulling back from banks and infrastructure
companies, a reversal of some popular postelection trades. The S&P 500’s
financial sector fell 2.9% in March, while industrials declined 0.8%.
The Dow Jones Industrial Average,
which has a hearty weighting of industrial companies and big banks, posted a
4.6% gain, a slowdown from the previous quarter.
The failure of Republicans’
health-care bill, intended to replace the Affordable Care Act, has led
investors to question the Trump administration’s ability to implement other
agenda items like a corporate tax overhaul, looser regulations and fiscal
Instead, investors have turned to
companies that have generally served up better-than-average returns since the
financial crisis: large technology companies.
Apple Inc., a component in the
three major indexes, jumped 24% in the first quarter, lifted by solid sales for
its new iPhone, high hopes for the next model and stabilizing revenue out of
China. Apple’s rise added more than half a percentage point to the S&P
500’s quarterly gains, according to S&P Dow Jones Indices.
Growth stocks, companies that
many investors expect to post stronger earnings in times of a prospering
economy, have outperformed value stocks, or those whose shares appear cheaper
compared with their earnings. The Russell 1000 Growth index ended the quarter
up 8.5%, compared with the Russell 1000 Value index’s 2.6% rise.
That comes as the U.S. economy has
continued to show signs of strength this year. The personal-consumption
expenditures price index, the Federal Reserve’s preferred inflation gauge,
exceeded the central bank’s target for a 2% annual gain for the first time in
nearly five years, at 2.1%, the Commerce Department said Friday, a day after it
said U.S. economic growth in the fourth quarter was revised up from earlier
Optimism among business owners
and investors also has climbed. The National Federation of Independent Business
said in February that its index of small-business optimism reached its highest
level in a dozen years in early 2017, and a University of Michigan survey
released in March found consumers feel better about the economy than they have
in the past 17 years.
“A lot of people are saying the
Trump trade is over, but I think the rally is predicated on fundamentals, not
on Donald Trump,” said Jeff Schulze, investment strategist at ClearBridge
Still, some investors are
concerned that first-quarter GDP could be weak, with the Federal Reserve Bank
of Atlanta’s GDPNow tracker forecasting economic growth at a 0.9% pace
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