Quarterly Client Letter – Q1 2017

Dear O’Brien Wealth Partners Investor:

The stock market rally, seemingly sparked by the U.S. presidential elections, continued its momentum in early 2017. Both U.S. and international equities delivered positive performance for the first quarter. Late in the first quarter stocks pulled back slightly from their all-time highs. The failure to reform Obamacare cast doubt on the ability of the new Administration to implement other parts of President Trump’s agenda, such as corporate and personal income tax reform and infrastructure investment. In our view it would be unwise to attach too much significance to what has been referred to, somewhat tongue in cheek, as the unfolding reality show in Washington. The recovery in global growth and corporate earnings, the true drivers of the rally, actually began several months prior to the election.

The acceleration in nominal global GDP growth, which increased more than 2% in 2016, has been driven by stabilization in the price of oil, a decline in austerity, and the current and delayed effects of easy monetary policy in the U.S. and Europe improving consumer confidence and business sentiment. The World Bank expects global GDP to accelerate rapidly to a 6% year over year increase in 2017. Stronger global growth should continue to support acceleration in corporate earnings over the remainder of the year.

In the U.S., nominal GDP growth increased by 3% in 2016. While nominal GDP growth is expected to accelerate this year, even absent potentially growth-enhancing legislation such as tax reform and infrastructure spending, it is likely to remain well below its long term average of 6.8%. Weaker growth itself may not be terribly problematic; the Federal Reserve has now exercised its power to raise short term rates twice in the past four months to rein in above-trend growth. But what we should realize is that the absolute level of growth is much lower now than in the past. Still, corporate earnings have been increasing for the past six quarters and are likely to remain strong through 2017. To us this indicates that U.S. stocks still have room to run; however, at some point, either later this year or next, returns are likely to be more muted.

Bonds also performed positively for the quarter with active bond managers delivering the best performance, particularly those with international and high yield exposure. After a difficult fourth quarter, municipal bonds outperformed their taxable equivalents due to decreased supply and increased uncertainty around potential income tax reform. While the Federal Reserve raised rates by .25% during the first quarter, interest rates in the U.S. remain near historical lows and both corporate and consumer borrowing costs remain relatively unaffected.