Market Insights - April 2018
Financial markets started the year at full bore, benefiting from the considerable momentum of last year’s gains, as well as a surge in investor enthusiasm. The quarter, however, concluded in very different circumstances. Volatility, hardly a factor in 2017, returned with a vengeance, as the markets were buffeted by inflation concerns, a sell-off in the leading technology companies, and heightened political uncertainty.
Anticipating the effects of a broad tax cut, market averages soared to new highs at the end of January. Belatedly, investors poured money into equity funds, only to be crushed over the first ten days in February, as both the S&P 500 and Dow lost over 10% and fell into correction territory. Concerns about rising deficits, increased government borrowing and wage-driven inflation blindsided stocks and bonds; the yield on the ten-year U.S. Treasury hit a four-year high, topping out at nearly 3%.
Tech stocks reversed the declines in March, with a stunning recovery to well over their January highs, only to be flattened by the prospect of greater regulation following Facebook’s issues with user data, as well as investors’ growing sense that their valuations had become unsustainable. Three companies, Facebook, Apple and Alphabet (Google) lost more than $150 billion in market value in March. Meanwhile the Dow and the S&P struggled, regaining some ground with two concerted attempts to rally, before succumbing to tariff and trade war fears at the end of the month.
The Dow lost 1.96%, its first negative quarter in more than 2 years. The S&P 500 fell .76%. The Nasdaq gained 2.6%, but still its weakest showing since 4Q 2016. Smaller companies fared somewhat better, with the S&P Small Cap 600 eking out a fractional gain. International markets were mixed. Developed markets measured by the IShares Msci ETF fell nearly 1.4%, while emerging markets gained 1.47%. Fixed income returns were mostly negative, although the ten-year treasury ended at 2.74% well below the 3% level that seems so spooky to investors. Intermediate-term government bonds, as well as corporate and high yield bonds posted slightly negative returns as well. The US dollar lost 2.1% in the first quarter; the Yen advanced over 5% against the dollar a move likely to thwart Japans export driven growth strategy.
First quarter results begin reporting mid-April. Consensus estimates are for earnings to post 18.5% year-over-year; a result of the effects of the tax cuts combined with an already strong economy. Expectations are high; still, should bottom-line projections for the balance of 2018 be strong, it would certainly be a stabilizing influence for stock prices.
We are not overly pessimistic at this juncture. There are several strong positive factors going forward, including synchronized global growth, the impact of tax cuts here in the US stimulating demand, as well as persistent earnings momentum. The recent declines also allow a better case for valuation to be made; price-earnings ratios, the number of times annual earnings stocks are valued at, have dropped from 18.6 to 16.1. There are negatives as well; uncertainty over the path of rising interest rates, concerns about increased deficit-led borrowing and inflation, and a global trade policy faced by increasing protectionist threats here and abroad.
Our longer-term outlook for balanced portfolios remains very positive. The twin engines of economic prosperity, innovation and productivity, never move in lockstep and often stumble, particularly in times of disruption and rapid change, as we are experiencing now. The impact of transformational innovation on the growth of our economy, we believe, will reward long term investors handsomely.
Registered Investment Advisor
Eugene Balerna, CIMA ®
Director, Investment Research