q4 2017 m r - massmutual · pdf fileq4 2017 m arkets r eview highlights stock markets around...

Q1 2018

Markets Review and

Economic Commentary

Stock markets started the

quarter strong but

experienced a sharp fall

in February. Rising interest

rates and talk of tariffs

overcame rapid

corporate earnings

growth.

The CBOE Volatility Index

(VIX), measures the

implied volatility of the

S&P 500 Index as

indicated by options

pricing. In February, the

VIX spiked and the

resulting drag on

financial products tied to

it drove volatility higher

and contributed to stock

price declines.

Overview

Stock prices continued their steady upward climb into the start of 2018

as the S&P 500® Index (S&P 500) reached new highs in late January.

However, a notable period of contraction in February left the S&P 500

right about where it started at the end of the quarter, posting a -

0.74%.

Bond yields rose driving prices lower as the Federal Reserve Board

(Fed) and its new chairman, Jerome Powell, raised the federal funds

rate another 0.25% in March. The prospect of more such rate hikes in

2018 contributed to a rapid change in sentiment regarding stocks.

While rising rates may have been the catalyst for a change in stock

market sentiment, hedging activity surrounding volatility products

served to accelerate the shift. As volatility rose and the CBOE Volatility

Index (VIX) spiked, a number of financial products tied to the VIX

endured large losses and some even ceased operations.

A series of tariff- and trade-related actions by President Trump

developed into a tit-for-tat drama with China and added more

uncertainty to the markets. Most investors saw the President’s actions

as positioning for a final deal that avoided a worst-case scenario, but

some panicked or decided to not take a “wait and see” stance and

sold off, putting pressure on stock prices. Add to this, some signs that

rapid global growth may be cooling and the result was tepid

performance by the S&P 500 for the quarter, its first loss in nine

consecutive quarters.

U.S. companies reported strong earnings growth for the fourth quarter

of 2017. Nearly three-quarters of companies in the S&P 500 beat their

earnings estimates and 77% beat their revenue estimates. Actual

earnings growth averaged an astounding 14.8% for the quarter and

revenue growth averaged 8.2%. Recent tax cuts and optimism around

growth helped push sell-side earnings estimates for the first quarter of

2018 to anticipate additional growth of 17.1%. (source: Factset)

S&P 500® is a registered trademark of Standard & Poor’s Financial Services LLC

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CBOE Volatility Index: VIX (10 Year)As Of: 3/31/2018

Source: Chicago Board Options Exchange

Markets Review and Economic Commentary Q1 2018

Retail sales disappointed

for the quarter. However,

employment growth and

generally positive

consumer and business

sentiment suggest

economic trends remained

solid.

The Fed under new Chair

Jerome Powell appears to

be locked into further rate

hikes in 2018 and 2019.

Inflation has gravitated

toward 2% but there are

few signs of runaway

inflation.

The U.S. Economy

The U.S. gross domestic product (GDP) grew by 2.9% in the fourth

quarter of 2017, decelerating somewhat from its 3.2% pace in the third

quarter, but slightly ahead of expectations. A strong holiday shopping

season aided growth, while the U.S. trade deficit added the largest

drag. The U.S. Purchasing Managers Index (PMI) jumped in February

before tapering in March. February’s durable goods orders, which

came in well ahead of expectations, pointed to domestic

manufacturing health.

Retail sales disappointed for the quarter as consumers pulled back on

spending. However, consumer sentiment remains high. The University of

Michigan U.S. consumer sentiment survey rose to a new 13-year high in

March. This strong sentiment could support returning consumer

spending going forward. Business sentiment also remains high,

indicated by the NFIB Small Business Optimism Index hitting news highs

in February.

At quarter-end initial jobless claims hit their lowest level in decades.

Employment trends remain firm as payroll growth continued and more

workers entered the work force. However, the March Non-Farm Payrolls

report, which was released after the quarter-end, did show a dip in the

pace of hires.

Inflation & Monetary Policy

The headline Consumer Price Index (CPI) rose by 2.2% year-over-year

for February and remaining above 2% since last fall. The Fed’s primary

inflation indicator is the Core Personal Consumption Expenditures (PCE)

deflator which is staying below 2%. In this borderline inflationary

environment, the Fed chose raised the federal funds rate by 0.25%

setting a new target of 1.75%. Fed Chair Jerome Powell appears to be

locked into further rate hikes in 2018 and 2019. Fed minutes emphasized

the balanced nature of the current economy and upgraded their

estimates of future labor market strength and economic growth.

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Feb-16 Jun-16 Oct-16 Feb-17 Jun-17 Oct-17 Feb-18C

ha

nge

in

Th

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san

ds

of P

erso

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Change in Total Non-Farm PayrollsSources: St. Louis Fed, U.S. Bureau of Labor Statistics

As of: March 2018


Global economic growth

may have slowed from

their elevated levels but,

most indicators

suggested that activity

remained strong.

The upward momentum

stock investors enjoyed in

2017 persisted early in

quarter, but, rising interest

rates, a volatility spike,

and trade confrontations

pushed the S&P 500

Index down sharply in

February. The Index

ended the quarter in

negative territory.

The Global Economy

Global economic growth momentum slowed somewhat. Figures

released in the first quarter showed the Eurozone economy growing

at a 2.7% annual rate. The March Eurozone PMI Composite for the fell

to 55.2, off a recent high of 58.8. Any level above 50 suggests

expansion. Japan’s economy logged a 2.0% growth rate and its

composite PMI fell to 51.3 in March. Both countries are likely hindered

by a weaker dollar and more competition from U.S. manufacturers,

as well as seasonal trends.

China’s central bank raised its rates following the Fed’s March

increase. However, the Bank of Japan reiterated a commitment to

monetary stimulus with currency strength, trade, and a brewing

political scandal influencing the decision. The European Central Bank

also held steady, but indicated its likelihood to end easing activity

later in 2018.

A land deal scandal involving Japan’s prime minister Shinzo Abe

introduced uncertainty into one of the most stable governments that

country has seen in decades. In China, the Communist party

formalized President Xi Jinpeng’s elevated status, and presumably

political power, by announcing plans to abolish term limits in

February. In Europe, German prime minister Angela Merkel’s position

was diminished by the need for a grand coalition and French

President Emmanuel Macron continued his push for reforms in France

and the European Union.

3

Domestic Stocks

Equity investor’s optimism in sharply rising markets, buoyed by positive

news on corporate earnings growth, tax cuts, and global economic

growth, faded somewhat during the quarter. Good news gave

ground to bad as rising interest rates dampened enthusiasm and the

impact of structured volatility products based upon the CBOE’s VIX

index amplified market moves. By quarter-end, the mood turned

even more cautious as Facebook faltered and Trump administration

trade rhetoric led to a flight from risk. Global economic trends, while

generally still positive, surprised to the downside.

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Jan Feb Mar

S&P 500 - Year to Date 2016Sources: Bloomberg

As of: 3/29/20182018


International Stocks

International stock markets mirrored those in the U.S. during the quarter

with gains to start the year followed by a mid-quarter slump. Developed

market equities recorded modest losses for the quarter and emerging

market stocks held up better to post modest gains. The U.S. dollar was

generally weaker, which offset more dramatic losses for foreign markets

in their local currencies.

Growth stocks outpaced

value stocks once again in

the quarter and small cap

stocks held up better than

large cap stocks.

Stocks in the information

technology sector enjoyed

another strong quarter. The

difference in return

between the best-

performing sector and and

the worst-performing sector

was over 10%.

International stocks slightly

lagged U.S. stocks despite a

generally weaker U.S. dollar.

Market Capitalization & Style

U.S. small-cap stocks and growth stocks outpaced the S&P 500 Index for

the quarter. Growth stocks, which outpaced value stocks, saw large

gains to start the year then struggled to hold on to them through March.

Small caps stock finished the quarter strong with a positive return during

March.

Sector

Stocks in the information technology and consumer discretionary stocks

held onto early quarter gains to lead the market. Modest losses in large

sectors, such as financials, health care, and industrials, weighed on

returns as did large drops in smaller sectors, such as consumer staples

and telecommunication services.

Source: Morningstar Direct℠ as of 3/31/2018

Asset Class MTD (%) QTD (%) YTD (%) 1 Year (%) Benchmark

U.S. Large Cap Stocks -2.54 -0.76 -0.76 13.99 S&P 500 Composite

U.S. Mid Cap Stocks 0.06 -0.46 -0.46 12.20 Russell Mid Cap

U.S. Small Cap Stocks 1.29 -0.08 -0.08 11.79 Russell 2000

U.S. Value Stocks -1.54 -2.82 -2.82 6.81 Russell 3000 Value

U.S. Growth Stocks -2.44 1.48 1.48 21.06 Russell 3000 Growth

S&P 500 Index Sectors Weights (%) Returns (%)

Consumer Discretionary 12.50 3.13

Consumer Staples 7.87 -7.12

Energy 5.85 -5.89

Financials 14.90 -0.97

Health Care 13.80 -1.27

Industr ials 10.25 -1.55

Information Technology 24.38 3.54

Materials 2.95 -5.51

Real Estate 2.73 -5.01

Telecommunication Services 1.96 -7.49

Uti l i ties 2.77 -3.30

Total -0.76


4

Past performance does not guaranteed future results.



Export economies, such as

Germany and Japan, are

starting to show the impact

of their recent currency

strength.

The U.S. Treasury yield curve

shifted higher and flattened

as the Fed raised the

federal funds rate.

Historically, yield curve

flattening often occurs near

economic slowdowns.

Fixed Income

The yield on the 10-year U.S. Treasury bond moved sharply higher to start

the quarter before falling slightly lower in response to equity market

volatility in February and March. Even as longer dated bond yields rose

the yield curve remained flat as 2-year Treasury yields rose in response to

a higher Fed funds rate. The spread between 2-year and 10-year

Treasury bonds came in at 0.47% compared to 1.14% a year ago.

The Fed has now raised the federal funds rate six times since its first move

in December 2016. The target rate now sits at 1.50 -1.75%. Fed

projections suggest at least two more rate hikes in 2018 and further

moves in 2019. Along with the ongoing removal of quantitative easing, it

is no surprise that these modest moves roil the bond market. Rising rates

make fixed income investing more challenging and investors were

reminded that losses are possible in bonds.



Developed Market Stocks (USD) -1.80 -1.53 -1.53 14.80 MSCI EAFE (net)

Developed Market Stocks (LCL) -2.23 -4.28 -4.28 5.34 MSCI EAFE (net) LCL

Currency Impact +0.42 +2.75 +2.75 +9.46

Emerging Market Stocks (USD) -1.86 1.42 1.42 24.93 MSCI EM (net)

European Stocks (USD) -1.20 -1.98 -1.98 14.49 MSCI Europe (net)

Japanese Stocks (USD) -2.11 0.83 0.83 19.64 MSCI Japan (net)

Pacific Country Stocks (USD) -4.16 -3.73 -3.73 8.43 MSCI Pacific Ex Japan (net)

5

Signs that economic growth may be decelerating affected

European markets. For the Eurozone, part of the slowing may be drag on exports and manufacturing caused by the Euro’s strength

over the past twelve months. Japan’s economy and stock market

followed a similar pattern, as industrial production disappointed and

the Yen strengthened during the quarter.


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Jan Feb Mar

10-Year U.S. Treasury Yield - Year to DateSources: St. Louis Fed, Board of Governors of the Federal Reserve System (US)

As of: 3/29/2018


The returns on U.S. long

duration treasury bonds

were negative as interest

rates moved higher.

Commodity prices

generally outpaced stocks

and bonds but not by a

lot. Real Estate Investment

Trusts (REITS) prices were

down sharply.

Regions

International bonds delivered solid gains largely driven by increases

in currency values. Modest inflation and a potential pause in global

growth supported prices. Emerging-market bonds are generally more

sensitive to market volatility and they only trailed the Bloomberg

Barclays U.S. Aggregate Bond Index slightly for the quarter.

Credit

High-yield bond prices tend to be less sensitive to interest rate moves,

which helped during the quarter. Corporate bonds encountered

drag due to interest rate sensitivity and some weakness caused by

widening spreads, which tracks the difference in yield versus U.S.

Treasury bonds.

Duration

The move to higher interest rates drove longer-duration bonds were

down sharply. Longer-duration bonds generally are more responsive

to interest rate moves.

Real Estate & Commodities

Rising interest rates also put downward pressure on Real Estate

Investment Trusts (REITs), as did lagging sentiment regarding retail

trends. Rising oil and gold prices supported commodity prices, but

industrial metals, such as copper, were down keeping the Bloomberg

Commodity Index in the red. West Texas Intermediate oil prices

ended the quarter at $62.34, up just $1.92 from the end of 2017.



U.S. Bonds 0.64 -1.46 -1.46 1.20 Barclays US Agg Bond

Developed Market Bonds 1.43 3.62 3.62 11.75 Barclays Gbl Agg Ex US

Emerging Market Bonds 0.38 -1.78 -1.78 3.34 JPM EMBI Global

U.S. Corporate Bonds 0.25 -2.32 -2.32 2.70 Barclays US Corp

U.S. High Yield Corporate Bonds -0.60 -0.86 -0.86 3.78 Barclays US Corp High Yield

U.S. TIPS 1.05 -0.79 -0.79 0.92 Barclays US Treasury US TIPS

U.S. Long Duration Treasuries 3.13 -3.36 -3.36 3.85 Barclays US Treasury 20+ Yr


6



U.S. Real Estate 3.78 -5.91 -5.91 0.13 DJ US Real Estate

Commodities -0.62 -0.40 -0.40 3.71 Bloomberg Commodity

Gold 0.41 0.95 0.95 5.21 Bloomberg Sub Gold


7Markets Review and Economic Commentary Q1 2018

Conclusion

Volatility, trade confrontations, and higher interest rates dragged the broad market, as measured by

the S&P 500, to a modest loss the first quarter. This came, despite surging earnings growth and Wall

Street’s expectation that earnings growth should continue.

The “feel good” atmosphere of January is behind us as risk returned to the forefront, including

geopolitical risk in the Middle East and on the Korean peninsula. The political and policy atmosphere

in Washington D.C. remains uncertain. Tariffs and trade restrictions could add to short-term inflation

pressures. The Fed appears committed to a series of federal funds rate hikes and an upward-trending

surprise on inflation could mean more aggressive policy moves. Given that stock valuations remain

high, this adds risk on the question of whether or not the economy grows and corporate earnings

move high enough to put upward pressure on stock prices.

After February’s rapid stock market contraction, the market’s momentum clearly paused. After

multiple consecutive quarters of gains, both stocks and bonds declined, reinforcing the wisdom of

investors who stick with a disciplined, diversified plan as a way to deal with the shifting trends in the

markets.

The performance data cited in this document represents past performance and should not be considered

indicative of future results. Current performance may be lower or higher than return data quoted herein.

Investors should carefully consider investment objectives, risks, charges and expenses. These materials and the platform of investments made available by MassMutual are offered without regard to the individualized

needs of any plan, its participants, or beneficiaries. These materials are not intended as impartial investment

advice or to give advice in a fiduciary capacity to any plan. This and other important information about

the platform of investments made available by MassMutual is contained in fund prospectuses and summary

prospectuses, which can be obtained from www.massmutualfunds.com and should be read carefully

before investing. These investments are not FDIC-insured, may lose value and are not guaranteed by a

bank or other financial institution.

The information provided is the opinion of MML Investment Advisers, LLC as of 3/31/2018 and is subject to change without notice. It is not to be construed as tax, legal or investment advice. Past performance does

not guarantee future results.

© 2018 Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001. All rights

reserved. www.massmutual.com.

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