Market Update: First Quarter 2018

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    The first quarter of 2018 was a friendly reminder that stocks can, and do, go down from time to time. For the first time in nine quarters, the U.S. financial markets delivered a negative overall return. The year started strong for stocks with January looking much like all of 2017—a steady, uninterrupted, rise in prices. The first week of January saw the Dow Jones Industrial Average rise above 25,000 for the first time ever. Less than two weeks later it closed above 26,000. The two other major U.S. market indices, the S&P 500 and the NASDAQ, also reached all-time highs.

    That was the calm before the storm. Less than two weeks after the S&P 500 hit its all-time high on January 26th, it found itself in correction territory. A market correction is measured by a decline in stock prices of more than 10%. Investors hadn’t experienced a stock market correction in more than two years. The decline in stock prices was quick with little warning, as always. For many, it served as an opportunity to reassess their own risk tolerance.

    After getting off to a solid start, the S&P 500 finished the quarter down 1.2%. Small U.S. stocks, as measured by the Russell 2000 Small-Cap Index, lost a bit of ground as well, falling 0.1% for the quarter.

    International developed stocks fully participated in the downturn. The broad-based MSCI EAFE index of companies in developed foreign economies lost 2.4% in the recent quarter. Emerging market stocks of less developed countries, as represented by the MSCI EAFE EM index, gained a meager 0.9% in dollar terms in the first quarter. It was the lone bright spot in the global equity markets.

    In the bond market, prices declined as interest rates rose, with the Barclay’s Aggregate Bond index losing 1.5% in the first quarter. Yields on 10-Year U.S. Treasury rose to 2.74%, from 2.40% at the end of 2017.

    Looking over the other investment categories, real estate, as measured by the Wilshire U.S. REIT index, fell 7.4% during the year’s first quarter. This was by far the worst performing asset class, as rising interest rates put pressure on real estate prices. Gold prices were up 1.8% during the first three months of the year.

    There weren’t many places to hide, as both stocks and bonds posted negative returns in the first quarter. It’s only the eighth quarter in the past thirty years where both bonds and the S&P 500 declined in value.

    What is going on? As usual, there are plenty of potential culprits to point to among current events that have led to the recent market jitters: global trade wars heating up, the arrival of quantitative tightening (rising interest rates), inflation worries, troubles in tech-land over data privacy concerns, ongoing Brexit talks, and some interesting events over in the Koreas.

    What’s remarkable about the selloff over things that might or might not happen is that it came amid some very good news about the U.S. economy. The unemployment rate is testing record lows and new jobs are being created at record levels. More importantly, annual earnings estimates for S&P 500 companies rose 7.1% during the first three months of the year—the fastest rise since FactSet began keeping track in 1996.

    Ironically, the small downturn plus the jump in earnings may have forestalled a bigger corrective bear market later. The S&P 500, by some measures, is now trading at 16.1 times projected earnings for the next year, compared with 18.6 in late January when the markets were extraordinarily bullish. Stocks are not as overpriced as they once were, and the corporate tax cut could lead to higher reported earnings throughout the year.

    That said, we fully expect the recent, NORMAL, volatility to continue in the months ahead. There’s no reason to think otherwise.

    If we’ve done our job of preparing you and your portfolio for market jitters, you might be able to cite back to us why you’ve already done all you can do to manage the volatility, and why it’s ultimately expected to be good news for evidence-based investors anyway. Remember, if there were never any real market risk, you couldn’t expect extra returns for your risk tolerance. History rewards patience.

    If we can answer any questions about your investments or meet with you to go over your general plans and goals, please let us know.

     

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