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To boldly go where stocks have not gone before…

By: Mary Fjelstadt, Senior Research Analyst

January 2017 saw the US stock market hit several index milestones. After the contentious presidential campaign leading up to the 2016 election, the US ushered in a new administration on January 20 that promised sweeping changes to economic and financial policies. So it seems logical to ask whether the equity market peaks in January may be attributable at least in part to the new administration.

The Dow Jones Industrial Index hit a record high on January 25, closing above 20,000 for the first time in its history. The broader-based Russell US flagship indexes—the Russell 1000®, 2000® and 3000® Indexes—also all closed at historic highs during the month.[1] But total index returns for January were not the stuff that headlines are made of. As the market continues to digest Trump’s effect on the economy, some equity styles and sectors performed well while others did not.

The total January returns for the Russell 3000 and the Russell 1000 were just 1.88% and 2.01%, respectively—putting them in line with average monthly returns over the indexes’ histories going back to 1979. The 0.39% monthly return for the Russell 2000 in January was actually below the monthly average for this index.[2] Despite this, the three indexes each hit their peaks in January, largely due to their Q4 post-election rallies, as illustrated below.

Russell 3000, 2000 and 1000 daily index levels October 2016 through January 2017

Source: FTSE Russell. Past performance is no guarantee of future results. Please see the end for important legal disclosures.

From a style perspective, we can see below that both growth & dynamic styles outperformed their value and defensive counterparts while small caps underperformed large caps by 1.62% in January. This mix of “risk-on” and “risk-off” indicators hints at a market that is a bit uncertain about Trump’s longer term market effect.

Performance of the Russell 1000 and Russell 2000 Style Indexes in January 2017

Source: FTSE Russell. Past performance is no guarantee of future results. Please see the end for important legal disclosures.

A closer look at sectors may offer clues as to what was going on behind the index headlines. Trump has promised to promote US industry, manufacturing, oil production, and infrastructure while dialing back the financial industry regulations put in place by the Obama administration and repealing the Affordable Care Act.

Russell 1000 and Russell 2000 January 2017 Performance by Sector

Source: FTSE Russell. Past performance is no guarantee of future results. Please see the end for important legal disclosures.

From the sector outcomes illustrated above, it is logical to surmise that expectations about government policy changes influenced the US stock market. Health care, for example, was the leading sector in the Russell 2000; basic materials—possibly due to connections with infrastructure rebuilding—led in the Russell 1000. A bit surprisingly, returns for financials were not that strong; financials even posted negative returns in the small cap segment of the market. Oil & gas was the only sector with negative returns in both small and large caps, possibly due to expectations of a supply glut driven by the proposed expansion of US domestic drilling, fracking, and pipelines.[3]

It is wise to be cautious about drawing any strong conclusions from the index levels in January since, by January 31, the new president had only been in office for 11 days. Nevertheless, a detailed look at the Russell US Index returns for the month, particularly in sector performance, suggests that market participants may be anticipating important changes in the US economy.

For a closer look at how the US election affected the small cap sector, read our recent blog posting, “The Trump Bump?”.

 

[1]Source: FTSE Russell. Past performance is no guarantee of future results. The Russell 1000 and Russell 3000 peaked on January 25 and the Russell 2000 peaked on January 4.

[2] Source: FTSE Russell. Past performance is no guarantee of future results. Returns shown may reflect hypothetical historical performance. Please see the end for important legal disclosures.

[3] See, for example, http://www.cnbc.com/2017/01/30/oil-prices-down-5-percent-in-january-as-r...

 

 

 

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