Market Overview
The overwhelming story of the 1st quarter of 2018 was the return of volatility to our financial markets. In the past quarter, investors saw the S&P 500 experience 6 trading days of plus or minus 2% moves; something that did not occur during a single trading day in 2017. The stock market in 2018 is proving to be more sensitive to political posturing, threats of a trade war, rising interest rates, and inflationary fears. This volatility, however, is far from abnormal with a 12% decline at some point during each year being the average. Lack of volatility during 2017 spoiled investors.
Equity Markets
The quarter started out similar to last year, with the S&P 500 advancing 5.62% in January. In contrast, February and March proved to be a bumpy ride with the stock market retreating 3.89% and 2.69% respectively. The U.S. stock market saw a 1.22% decline compared with a 2.38% decline in developed international equities where the potential risk of a trade war is causing economic uncertainty in a similar fashion. International emerging market equities continued to be a bright spot for investment illustrating a 0.91% return for the first quarter due to improving economic conditions and earnings growth.
International Trade and the Markets
With the announcement of steel and aluminum tariffs and the more recent tariffs of up to $60 billion on Chinese imports, there is the potential for an increased risk of a trade war. A trade war would mean that tariffs are raised steeply and broadly across a range of products and potentially across multiple countries. A trade war among major countries hasn’t occurred in over 90 years but the results have been very bad for economies in the past. Most research and analysis indicates that the current situation would not be expected to deteriorate to this level; however, renegotiating existing trade agreements will have an effect on different businesses/sectors of the economy. Trade announcements from the current administration will likely continue to create volatility in the financial markets, most likely in the short-term.
Tech Stock Challenges
The very large and news grabbing FANG stocks (Facebook, Amazon, Netflix, Google) experienced challenges during the past quarter. Facebook, Twitter, and Alphabet (Google) in particular have recently found themselves in regulators’ sights due to concerns that privacy laws may have been violated. This could lead to more regulatory oversight causing an increase in operating costs. While the recent volatility in these stocks correlates somewhat to the rest of the NASDAQ, the NASDAQ as a whole actually still posted a positive gain for the quarter of 2.32%. The 7.36% gain of the NASDAQ in January perhaps was the market overbuying these stocks as they were 2017 winners.
Bond and Credit Markets
In March the Federal Reserve raised its benchmark 25 basis points to the range of 1.5% to 1.75%, marking the sixth time since the financial crisis that it has raised rates. The Fed also reiterated its forecast of three hikes for this year, meaning it expects two more for 2018. Given this backdrop of steadily increasing rates, fixed income markets were challenged during the first quarter. Both U.S. fixed income and global high yield were down 1.5% and 0.4% respectively. Municipal bonds also saw a 1.1% decline. In light of higher volatility, cash outperformed most other assets classes, returning a meager 0.3%.
The 10-year U.S. Treasury ended the quarter with a yield of 2.74%. The yield curve remains relatively flat.
Perspective for the rest of 2018
Looking to the rest of 2018, it is expected that market volatility will remain as it is the norm for stock markets. With that being said, analysts expect corporate earnings to continue to grow through the rest of 2018. Traditional stock market fundamentals remain supportive of an ongoing bull market and, in fact, the Index of Leading Economic Indicators rose again in March, continuing its robust upward trend. While sticking with an investment in stocks is more difficult when they aren’t moving straight up, the long- term return that these investments provide is often needed for investors to reach their financial goals. At CRA, we will continue to monitor our markets and portfolios carefully and thank you for your continued relationship with our firm.
Respectfully submitted,
CRA Financial, L.L.C.
Early Predictions
RALLY: The markets are off to a great start so far in 2017. The S&P 500 closed the second quarter with a strong year-to-date gain of 9.34% (Total return including dividends). Investors saw a market that remained resilient in the face of uncertainty and volatility was kept at bay. Corporate earnings remained strong, global economies have been improving, and major central banks across the world have continued support. Markets shrugged off repeated global terrorist attacks and a seemingly stalled presidency as a gridlocked Congress wrangled with the questions of the government’s appropriate role in the U.S. health care system. 
The 10 bear markets since 1929 combine for an average market drop of 45% over an average duration of 25 months. The bull markets that have preceded/followed those 10 bears have generated an average return of 154% over an average duration of 54 months. The current bull market, which began on March 2009, is well above those averages. The bulls just celebrated the 8th anniversary, and have cheered market gains of 231% through the end of 2016. With the market continuing to post impressive gains to start 2017, many investors are increasingly worried that a “pullback” is on the horizon. This increasing pessimism has many investors asking; “Is it possible to time the market?”