The growth in the equity markets has been far greater than the growth in our economy since President Trump was elected. The S&P 500 logged another quarter of growth with the index advancing 3.1% in the quarter and advancing 9.3% year to date. MACM’s dynamic growth portfolio also logged another good quarter of growth advancing 4.4% in the quarter and 13.5% year-to-date. This is not unusual as markets seem to perform the best during periods of slow growth with low inflation and friendly monetary policy. While this is true, we must note that the equity market rally paused in 2014 and 2015 when corporate America fell into an earnings recession and slow growth was replaced by no growth.

This earnings recession that had gripped corporate America finally came to an end in the fourth quarter of 2016 when the S&P 500 reported earnings growth of 8.4%. This occurred after eight quarters of flat growth for the S&P 500. Thus far in 2017 the recovery in earnings growth has continued with first quarter’s growth roaring at 17.8% and second quarters’ growth estimated to be 18%. Unfortunately it’s not time to break open the champagne as this growth in earnings has occurred despite only modest improvement in reported growth for GDP. GDP grew by 2.1% in Q4, 1.4% in Q1, and is estimated to grow at 2.4% in Q2. Earnings growth is almost always much stronger then GDP growth, generally related to improving margins at corporate America or financial engineering at companies, to show better earnings without actually earning more gross profit. These normal explanations have been ruled out and the mystery remains a problem for investors and the markets.

Equity markets have moved substantially over the last year for a variety of reasons and clearly one of those drivers of the markets was the improving picture for growth. This improving growth picture was founded upon actual improvement in S&P 500 earnings growth, expectations for improvement in GDP growth based upon improving consumer confidence and consumption, expectations for improvement in GDP growth based upon spending initiatives planned by the Trump administration, and expectations for stronger GDP growth due to an improving export market. Thus far the higher expectations for GDP growth that began at the end of 2016 have not been validated with stronger growth in GDP. This is a bit of a headwind for the markets but not a major obstacle as long as earnings growth continues, if even at a modest pace.

The leadership in the equity markets this year has correlated quite well with the leadership in earnings in the S&P 500. Technology, financials, healthcare, and industrials have all enjoyed great earnings

growth this year and likewise have been the leading sectors in the market. Conversely, utilities, energy, telecom, and consumer staples had poor earnings growth and thus were the laggards in the market.

Inflation continues to remain subdued with strong structural underpinnings that will keep inflation muted for years to come. As a result, central bank policy is accommodative and friendly and will likely remain this way until much stronger growth emerges.

The equity markets could do a lot better with an improved picture for growth in GDP. Unfortunately growth in consumer consumption is at a two decade low and likely to remain subdued due to debt levels that are still far too high. As a result, consumers continue to save at record levels and postpone consumption.

Washington policy has had the biggest impact on our financial markets this year than we have seen in decades. Generally Washington policy only impacts the economy meaningfully through changes it imparts on consumer confidence. President Trump has been highly successful in improving consumer confidence with the index now close to all-time highs.

Thus far President Trump has had substantial opposition from politicians to virtually everything he has sought to do. He has, however, had some minor victories recently that have given investors some optimism that his agenda can be achieved. However problems remain. President Trump was elected by a majority in a sharply divided nation with initiatives that will radically change America. Trump was elected based upon goals and plans he promised to put in place if elected. Some are quite controversial, which include cleaning up the swamp in Washington, reforming our tax structure, removing unnecessary regulations, destroying ISIS and radical terrorists groups that threaten America, replacing Obamacare, reforming our immigration process to emphasize immigrants who embrace American values, bringing jobs back to America, and improving America’s competitive position in the export market. President Trump’s tax cut and growth initiatives are wildcards that could accelerate growth should he have success in getting these plans off the ground.