Market Update 3.31.2018

Scott Campbell |

In last quarter’s commentary I indicated that volatility will return to the market and it did, with gusto.  After a strong start volatility spiked in the first quarter, causing the market to drop 0.61% for the quarter.  Throughout January, the market appeared to be on the same track as 2017, moving up, hitting new records with little volatility.  Investors cheered the passage of the corporate tax cuts that encourage corporations to bring their foreign profits back to the U.S.  Strong economic data and fourth quarter earnings that came in much better than expected further boosted investors’ positive sentiment.

Then in February volatility abruptly returned to the market with a jobs report that showed an increase in new jobs and a very healthy gain in the average hourly wages paid in the U.S.  The market plunged as investors worried that increases in wages (inflation) would push the Federal Reserve to raise rates more quickly than anticipated.  Increases in the 10 year treasury yield have also increased fears that inflation is on the rise.  Inflation is a sign that the economy is overheating and possibly headed for a slowdown or recession.  However, normal inflation is not bad; it is part of a healthy economy. 

As the quarter came to a close, fears that the economy was overheating were replaced with fears of trade wars.  On March 1, President Trump, in a surprise move, imposed tariffs on imported steel and aluminum.  The tariffs were later revised to exclude many countries, but not China.  China responded with threats of their own tariffs on US imports.  However, President Trump just announced that some of his top economic advisors are headed to China to begin trade talks.

At the very end of the quarter technology stocks tumbled over concerns raised over the security of users’ data, two fatalities involving self-driving cars and President Trump’s tweets regarding Amazon.  Concerns remain over the possibility of government regulation of internet companies and the effects on their businesses.

The U.S. economy, in the first quarter, continued its upward trend with overall growth and employment posting solid gains.

  • most recent estimate for GDP growth for the fourth quarter 2017 came in at a seasonally adjusted annualized rate of 2.9%.
  • the employment situation remained very robust, far outpacing expectations
  • consumer spending continued to drive growth during the quarter.
  • inflation showed signs of picking up during the quarter.
  • housing remains robust, and analysts have a positive outlook for 2018.
  • The Fed increased rates by 0.25% in March to 1.50% to 1.75% and is expected to raise rates at least three more times in 2018.
  • The Fed also increased estimates for GDP growth for 2018 from 2.5% to 25.7%

However, economists caution that sustaining current levels of growth, at full employment could be difficult.

The Eurozone economy also grew at a rate well above trend.  Japan’s economy is expected to maintain its strong momentum into 2018.  China continued its strong growth from 2017 and experienced its first year over year gain since 2010. 

All in all, our economy is very strong.  Corporate profits are up.  Employment is solid.  But the volatility that had disappeared for almost 2 years has returned.  Please keep in mind when you listen to media reports that with current market levels, a 500 point drop isn’t that big a drop anymore.  But be aware that we are heading into a traditionally slower time for our economy.  The economy has always slowed in the summer months.  In past years some in the media have called this seasonal trend the beginning of a recession.  Given the nervousness that has returned to the market, these types of reports are likely to add to the volatility.  There is nothing to indicate we are headed for any major problems, just normal economic and market conditions with a little more volatility to make up for the lack of it previously. 

As always, stay invested and save as much as you can for your retirement.  Please contact me with any questions or concerns about your account.