During the first three weeks of the year, the financial markets have been relatively calm.  If there is any “trend” we have observed, it is the simple fact that some areas of the market which rallied the most after the Presidential election in 2016 are now relative laggards in 2017, and areas of the market which performed the worst are now the market leaders.  The numbers are not huge – most asset class returns are between -1% and 3% so far in 2017, but here are three examples of what we are seeing:

1. International Stocks are Outperforming U.S. Stocks.  At the end of 2016, International Stocks performed well in local currency terms, but for U.S. investors, those returns were offset and then some by a spike in the value of the U.S. dollar.  For U.S. investors in international stocks, a stronger dollar hurts returns while a weaker dollar helps returns.  So far in 2017, we have seen the dollar weaken from its December highs meaning the dollar headwind has turned to a tailwind for international stocks.The fluctuation of the dollar (strength or weakness) has an impact on U.S. trade as well and that has been a topic of discussion for The Joseph Group investment committee. This week we noted it also appears to be a big topic for now President Trump, who stated in a Wall Street Journal interview that the dollar has gotten “too strong.”  According to President Trump, “Our companies can’t compete with them (China) now because our currency is too strong.  And it’s killing us.”
2. Large Cap Stocks are Outperforming Small Cap Stocks.  At the end of last year, small cap U.S. stocks had a huge post-election jump based on the prospect of lower taxes, less regulation, and reduced globalization.  So far in 2017, small cap stocks are giving back some of those gains and large companies are outperforming.  The Joseph Group’s investment committee believes the pullback in small caps is simply a reflection of going “too far, too fast” late last year.  We are likely to view any further lagging performance from small cap stocks as an opportunity for a better entry point into an asset class which should benefit from the new political landscape.
3. Health Care Stocks are Outperforming Financial Stocks.  From a sector standpoint, financial stocks (think banks) soared at the end of 2016 based on higher interest rates and the prospect of less regulation.  On the other hand, a combination of new regulatory concerns and Twitter comments weighed on the health care sector.  Health care was the only S&P 500 sector with negative performance in 2016.  Again, we are seeing “regression to the mean” in 2017 as financial sector performance is negative the first three weeks of the year, while health care stocks are market leaders.

Again, market action in 2017 has been relatively calm, but the reversal in leadership from December to January is a reminder to investors that chasing leaders is not always a winning strategy.   As we approach 2017, we are mindful that changes in policies may create shifts in the market, but we are also mindful of investment fundamentals and trying to avoid what is expensive and buy what is cheap.