The “Trump Rally” Stalls

by: , Chief Investment Officer and Managing Director | IndexIQ

The “Trump Rally” stalled in the second half of March. The Federal Open Market Committee (FOMC) raised the range for fed Funds to .75%-1.00%. The rate hike coincided with the inability of the Trump Administration and Congressional Republicans to move forward on their Health Care Bill. These developments, coupled with the ongoing inquiries into possible linkages between the Trump Administration and Russia, cast a bit of a pall on U.S. equity markets, as some doubts were raised about their ability to enact other legislative initiatives. International assets continued to rise, as Britain took the first step towards implementing the “Brexit” vote from last June.

The yield curve1 was little changed at the end of the month as rate declines on the long end over the last two weeks offset the move higher in the beginning of the month. The credit spread2 widened out on a slightly more pessimistic fiscal outlook.

On the economic front, the third estimate of fourth-quarter GDP was above expectations at 2.1%. Headline inflation went up to 2.7%. Employment gains were positive, exceeding 200,000 for the month. Consumer confidence rose sharply.

Hedge funds had positive returns, with the broad index up for the month. Five out of the eight strategies had positive returns, with Equity Market Neutral and Equity Hedge leading the way. Merger Arbitrage and Event Driven, in general, also had strong months.

Key Economic Data3

  • The U.S. Bureau of Economic Analysis (BEA) released the “third” estimate of real gross domestic product (GDP) growth of 2.1% in the fourth quarter of 2016. Real GDP grew by 3.5% in the third quarter of 2016, 1.4% in the second quarter, 0.8% in the first quarter, and 1.4% in the fourth quarter of 2015.
  • Headline inflation (U.S. Consumer Price Index for All Urban Consumers seasonally adjusted (CPI-U SA)) was 0.1%. Core inflation (CPI-Ex Food and Energy) was 0.2%. For the last 12 months, the CPI-U NSA was 2.7%, and the CPI-Ex Food and Energy was 2.2%.
  • The U.S. Bureau of Labor Statistics (U.S. BLS) announced that non-farm jobs increased by 235,000, after adding a revised 238,000 jobs in the prior month. Private sector payroll employment added 227,000, jobs following a revised increase of 221,000 jobs in the prior month. The unemployment rate was 4.7%. The underemployment rate was 9.2%. The labor force participation rate was 63% last month.
  • The U.S. Department of Housing and Urban Development (HUD) and the U.S. Census Bureau jointly announced that sales of new single-family houses were 592,000, a change of 6.1%. Housing starts were 1,288K, a change of 3.0%. Building permits were 1,213K units, a change of -6.2%. Existing home sales were 5.48 million units, a change of -3.7%.
  • The Conference Board Consumer Confidence Index® was 125.6.
  1. A yield curve is a curve on a graph in which the yield of fixed-interest securities is plotted against the length of time they have to run to maturity.
  2. A credit spread is the difference in yield between two bonds of similar maturity, but different credit quality.
  3. IndexIQ. FactSet as of 3/31/17

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All investments are subject to market risk, including possible loss of principal. Diversification cannot assure a profit or protect against loss in a declining market. Investors cannot invest directly in a benchmark.

Event Driven investing is designed to capture price movement generated by a significant pending corporate event, such as a merger, corporate restructuring, liquidation, bankruptcy, or reorganization.

Equity Hedge investing buys stocks that are undervalued and short sells stocks that are overvalued. This strategy may commonly employ variable exposure as well as the use of leverage.

HFRI Hedge Fund of Funds Index – Fund of Funds invest with multiple managers through funds or managed accounts. The strategy designs a diversified portfolio of managers with the objective of significantly lowering the risk (volatility) of investing with an individual manager. The Fund of Funds manager has discretion in choosing which strategies to invest in for the portfolio.

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Salvatore J. Bruno

Chief Investment Officer and Managing Director | IndexIQ

Sal is Chief Investment Officer at IndexIQ, where his primary responsibility includes developing and maintaining the firm’s investment strategies. Sal joined IndexIQ in 2007 from Deutsche Asset Management (DeAM) where he held a number of senior positions

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