Political chaos and legislative missteps from President Donald Trump’s administration haven’t been enough to quell Wall Street’s run higher, as the broader averages were poised Friday to book their biggest first-quarter gains in four years as technology shares rallied.
To its 7.8% gain from Election Day to the end of 2016, the Dow added another 4.5% in the first quarter while the S&P 500 burst 5.3% higher from its 4.6% gain on election optimism. Investors have driven stocks higher primarily on hope the president will follow through on his campaign promises of lower taxes, less regulation and more fiscal spending through infrastructure investment, but it was the technology sector that quietly stole the spotlight in 1Q.
The S&P 500 tech sector saw a 12.1% jump as the Nasdaq Composite leaped 9.8% during the period to its best quarter since the end of 2013. Red-hot FANG stocks – Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google (GOOGL) – all hit record highs in March, helped by continued earnings strength. Looking ahead to first-quarter earnings season, S&P Capital IQ predicts tech will be among the top three growth sectors for the third quarter in a row as it looks to post a 16.5% earnings per share growth rate – the highest of any sector.
The so-called Trump trade, which helped lead the market solidly higher during the first three months of the year, let out a bit of momentum last week when the commander in chief and his Republican allies in Congress were unable to make a success of their first legislative push. At the eleventh hour, House Speaker Paul Ryan pulled from a vote a bill aimed at replacing former President Barack Obama’s Affordable Care Act. The move – which some criticized as a rushed attempt at making good on Trump’s repeal-and-replace promise – caused Wall Street to wonder whether the White House would find success fulfilling its other fiscal priorities.
“Economic and political optimism may be overdone. It appears investors are finally starting to question the extent to which President Trump can deliver on his wide range of pro-growth promises,” said Bob Doll, chief equity strategist at Nuveen Asset Management in his weekly investment commentary. He added that the health-care setback could cause any politically-oriented economic boost over the next year to be less robust than expected, though he remains upbeat on the economy as fundamentals remain “solid.”
Indeed, consumer-oriented stocks were among the best performing during the quarter – the consumer discretionary sector jumped 8.3% while staples rose 5.9% -- as sentiment data remained at multi-year highs. The Conference Board’s gauge of consumer confidence released on Friday reached its highest level in 16 years as wages continue to rise and the labor market remains firm, all of which keep shoppers upbeat about future economic prospects.
While that confidence has helped boost parts of the market, it’s also one of the biggest risks for the remainder of 2017, said Jeff Powell, managing partner at Polaris Greystone Financial Group, who added that with 70% of the U.S. economy driven by consumption, political promises of lower taxes, repatriated corporate dollars and more spending on infrastructure would go a long way toward putting more money in the hands of American consumers. But if shoppers feel like things are heading south – their wallets will snap shut and spending could dry up.
“Having continued consumer confidence in the economy and job markets pays. So, as long as we continue to see strength in those areas, I wouldn’t be too fearful [of a meaningful pullback in the market],” Powell said.
Elsewhere, financials, energy and industrials – all of which posted hefty double-digit gains in 2016, were among the five worst-performing sectors in the first quarter, which some on the Street say signals the end of the so-called reflation trade, as euphoria over Trump’s campaign promises fades.
But not everyone has bought into that thesis.
“Despite the fact that Congress will continue to struggle to agree on anything substantial in the early part of this year, I think the underlying strength in the economy and the recovery that was already underway prior to the election will continue to improve,” Chris Zaccarelli, chief investment officer for Cornerstone Financial Partners, explained, adding that the pro-growth policies would only accelerate that processes and are not necessary for inflation and growth to continue.