STOCK MARKETS HAVE BEHAVED MUCH DIFFERENTLY IN THE LAST TWO MONTHS AS COMPARED TO THE PREVIOUS YEAR. The 5.6 percent rise for the S&P500 Index was the biggest January gain since 1997. This was promptly followed by the largest ever one-day spike in volatility and the first 10 percent correction in over two years. The correction in mid-February was then followed by an 8 percent rebound. A main takeaway from all of this and what we had highlighted to expect in our last quarterly review - volatility is back. Many factors are contributing to this including the Federal Reserve’s continued upward push of interest rates, inflation concerns, and potential protectionist actions by the current administration. All of these factors adding to already heighted geopolitical risks.
In the first quarter, both the U.S. Stock and Bond Markets were down 0.64 percent, and 1.46 percent respectively. Internationally developed markets (Europe, Japan, Canada) fell even further, down 2.04 percent for the period. Emerging Markets were the only equity asset class achieving positive results up 1.42 percent for the quarter. A globally diversified portfolio of 50/50 stocks/bonds also had negative returns, down 0.19 percent for the quarter.
Even with increasing concerns about valuation levels, growth stocks continued to outpace value. Both small and large cap growth stocks achieved solid returns, up 2.30 and 1.42 percent respectively. Even though 10-year periods and longer have outperformed growth, value stocks languished again down over 2.5 percent for the quarter.
Looking over other investment categories, the U.S. REIT index had the biggest drop of any asset class for the quarter, down 7.43 percent. The Bloomberg Commodity Index eked out a small gain, up 0.40 percent for the first quarter led by price increases in corn, soybeans and oil.
The Federal Reserve, under the direction of newly installed Chairman Jerome Powell and with the backdrop of a strengthening US economy, increased interest rates by a quarter point in March. Rising interest rates and the expectation of two additional rate increases this year have been the drivers behind the bond markets negative returns.
The Trump administration recently announced a potential $50 billion worth of tariffs on Chinese imports creating concern that trade wars will derail economic growth. With perspective though, it would appear these salvos are more about positioning for negotiations than crippling the economy.
The U.S. economy is on solid economic footing and there is reason to believe the economy will continue to be strong. 2018 will be the first full year impacted by the recent corporate tax cuts, and time will tell what impact these cuts have on driving growth. All indicators currently lead us to believe that unemployment will stay low, business confidence will remain at current levels and that the Federal Reserve will take a measured approach to increasing interest rates.
That said, our concern is that corporate earnings growth realized in the latter half of 2018 will not meet the heighted expectations of investors. According to Thomson Reuters, the estimated first quarter year-over-year growth rate for the S&P500 is 18.5 percent which would be the highest rate of growth in seven years. This is coming off of seven consecutive quarters of accelerating economic growth, matching the longest streak in the last 70 years. We expect overall corporate earnings to continue to be strong. However, unless new records are set for consecutive quarters of accelerating growth, we would anticipate equity returns to be moderate in the second half of the year.
An outside perspective
Markets have been up and down this year, which can be difficult for many investors to live with. During periods like these, hearing stories about how other people deal with uncertainty can be helpful.
Dave Goetsch is an executive producer of The Big Bang Theory. Even though he and the other writers on the show make common sense out of complicated science for a living, Dave used to respond to market fluctuations with panic rather than logic. But his point of view changed fundamentally when he learned to have a different perspective on investing and discovered a new path for his financial life.
I would encourage you to read Dave’s story, as told through his Dimensional Funds relationship. I think you’ll find it to be a source of calm. It also showcases the benefits of having an investment philosophy you can stick with.
We greatly appreciate the opportunity to work with each of you and hope your 2018 is off to a great start. As always, if you have any questions or concerns, please contact us and we would be happy to discuss.
Please click here to read the complete TFA Quarter in Review | 1Q 2018.