At the end of 2017, investors were focused on a phenomenal year in markets, featuring strong gains, exceptionally low volatility, and synchronized global growth. Three months later, two of the three have changed, volatility being the most notable. January took 2017’s “perfect year” to a parabolic extreme on the heels of tax reform. However, with that marking the 15th month of consecutive gains, a return to normal volatility was perhaps unsurprising. Meanwhile, the global economy continues to perform admirably even as headlines increasingly rule the tape.
Early February introduced cracks into the market’s foundation. Ironically, these did not come from economic weakness, but rather from unexpected signs of strength causing fears of overheating. The concern is that tight labor conditions may stoke inflation, challenging interest rate sensitive bonds and raising business costs. As ten-year treasury yields reached 4-year highs, US equities tumbled at a clip not seen since 2008, twice touching the highly watched S&P 500 Index’s 200-day moving average. The choppy trade was accentuated in the final week of the quarter when $150B in Whitehouse tariff proposals together with a Facebook data scandal brought the S&P 500 down again to annual lows, some -10% off their January highs. By early April, China’s President Xi had moderated trade war concerns, only for those to be quickly replaced by the prospect of direct US involvement in the Syrian conflict. Headline risks seem never ending!
Of course, market advances are built upon the perennial “wall of worry”. Bear markets during periods of economic strength are rare, while volatility events and corrections are common. The typical intra-year pullback from highs is approximately -14% (JP Morgan, Guide to the Markets, 12/31/17). For the moment, this looks to be no different. After all the drama, the S&P 500 US Large-Cap Index (‘SPY’ ETF Proxy*) was only down -1.0% on the quarter. The Barclay’s Aggregate Bond Index (AGG*) was harder hit on rate fears, down -1.5%, while Commodities (DBC*) finished higher by +2.2%. In spite of the pullback, relative strength continues among “risk-on” assets, such as Growth, Consumer Discretionary, and Emerging Market stocks. Importantly, first quarter earnings are projected to record a healthy a +17.3% year-over-year gain (Factset, “Earnings Insight”, 3/29/18).
Finally, while our economic outlook remains positive overall, note how The Encompass Portfolios have adjusted to the recent choppiness by raising cash to reduce day-to-day swings versus last year’s overweighting towards stocks. This is a prime example of how the system adapts holdings to changing market conditions. In this way, over the course of a full market-cycle we seek to outperform simple buy-and-hold approaches while helping clients to achieve their goals and sleep better at night.
*Dividend-adjusted proxy ETP data from Commodity Systems, Inc. as of March 31, 2018.
OUR TEAM
Jeff Pietsch CFA, Managing Director
Stocks Hit the Wall – Global Economy Keeps Chugging
At the end of 2017, investors were focused on a phenomenal year in markets, featuring strong gains, exceptionally low volatility, and synchronized global growth. Three months later, two of the three have changed, volatility being the most notable. January took 2017’s “perfect year” to a parabolic extreme on the heels of tax reform. However, with that marking the 15th month of consecutive gains, a return to normal volatility was perhaps unsurprising. Meanwhile, the global economy continues to perform admirably even as headlines increasingly rule the tape.
Early February introduced cracks into the market’s foundation. Ironically, these did not come from economic weakness, but rather from unexpected signs of strength causing fears of overheating. The concern is that tight labor conditions may stoke inflation, challenging interest rate sensitive bonds and raising business costs. As ten-year treasury yields reached 4-year highs, US equities tumbled at a clip not seen since 2008, twice touching the highly watched S&P 500 Index’s 200-day moving average. The choppy trade was accentuated in the final week of the quarter when $150B in Whitehouse tariff proposals together with a Facebook data scandal brought the S&P 500 down again to annual lows, some -10% off their January highs. By early April, China’s President Xi had moderated trade war concerns, only for those to be quickly replaced by the prospect of direct US involvement in the Syrian conflict. Headline risks seem never ending!
Of course, market advances are built upon the perennial “wall of worry”. Bear markets during periods of economic strength are rare, while volatility events and corrections are common. The typical intra-year pullback from highs is approximately -14% (JP Morgan, Guide to the Markets, 12/31/17). For the moment, this looks to be no different. After all the drama, the S&P 500 US Large-Cap Index (‘SPY’ ETF Proxy*) was only down -1.0% on the quarter. The Barclay’s Aggregate Bond Index (AGG*) was harder hit on rate fears, down -1.5%, while Commodities (DBC*) finished higher by +2.2%. In spite of the pullback, relative strength continues among “risk-on” assets, such as Growth, Consumer Discretionary, and Emerging Market stocks. Importantly, first quarter earnings are projected to record a healthy a +17.3% year-over-year gain (Factset, “Earnings Insight”, 3/29/18).
Finally, while our economic outlook remains positive overall, note how The Encompass Portfolios have adjusted to the recent choppiness by raising cash to reduce day-to-day swings versus last year’s overweighting towards stocks. This is a prime example of how the system adapts holdings to changing market conditions. In this way, over the course of a full market-cycle we seek to outperform simple buy-and-hold approaches while helping clients to achieve their goals and sleep better at night.
*Dividend-adjusted proxy ETP data from Commodity Systems, Inc. as of March 31, 2018.
Jeff Pietsch, CFA
Managing Director
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