The Trump reflation trade was on full display in the first quarter, as investors rallied behind expectations of faster economic growth under the new GOP administration. However, gains slowed significantly in March after failed healthcare legislation in Washington undermined confidence in the Trump presidency.
The large-cap S&P 500 Index returned 5.5% on the quarter, its strongest since a 6.5% advance at the end of 2015.
The Dow Jones Industrial Average also returned more than 5% on the quarter, while the Nasdaq Composite Index added nearly 10% for its best quarterly performance since 2013.
European stocks also wrapped up a strong quarter on surging bank shares and positive vibes from the U.S. The pan-European Stoxx 600 Index ended the quarter at fresh 15-month highs.
European markets are expected to potentially move higher this year if yield-seeking investors shift from Wall Street to the major bourses in London, Frankfurt and Paris. U.S. bank Morgan Stanley recently upped its forecast for European earnings, with financials in a “sweet spot” thanks to favorable economic conditions.
The bank expects earnings per share growth for 2017 to come in at 16% for the MSCI Europe. According to Morgan Stanley the index is set to rise 8% over the next 12 months.
Stronger than expected economic growth and the return of inflation to the Eurozone seem to have left investors feeling more optimistic about the health of the regional recovery. Eurozone inflation reached 2% in February for the first time in four years. Inflation weakened to 1.5% in March, but it seems it may stay within range of the European Central Bank’s target.
On the monetary policy front, the Federal Reserve raised U.S. interest rates in March for the second time in three meetings, as stronger inflation and steady job gains gave policymakers the justification they need to gradually remove accommodation. The Fed has two meetings lined up for the second quarter. Investors say the second of those meetings in June may result in a rate hike, according to the latest Fed Fund futures prices.
Gains may be harder to come by in the second quarter as markets look for tangible evidence that the Trump administration may spur faster economic growth. Last month’s failed healthcare reform cast dark shadows over the GOP administration and undermined Trump’s political capital a mere two months into the presidency.
Elsewhere, investors will also be monitoring the fallout from Britain’s March 29 Brexit trigger, which formally kick started the two-year divorce process. Fears of a hard Brexit could keep the British pound in a its current predicament and may keep monetary policy highly accommodative.
The April 23 French election could potentially trigger a paradigm shift, should far-right leader Marine Le Pen secure the presidency. Public opinion polls show Le Pen is expected to advance to the second round of the presidential race, likely pitting her against Emmanuel Macron in a run-off election.