First Quarter Market Review
It was a tumultuous start to the year, as volatility increased from the historically low levels experienced in 2016 and 2017. Stocks started out strong with the S&P 500 increasing almost 6%, its strongest start since 1987. The themes of synchronized global growth, strong earnings expectations, impact of tax reform, and general fear of missing out on a strong market drove equities higher. However, a 2.9% year over year increase in average hourly wages coupled with the prospect of faster-than -expected interest rate hikes caused some indigestion for the markets in February, with equity markets dropping roughly 10% from their highs. After a quick rebound and another market decline, all market indices except for emerging markets were negative for the quarter. The Dow and S&P 500, albeit down modestly, experienced their first quarterly decline since the third quarter of 2015. Interest rate sensitive sectors (telecom, consumer staples, REITS, utilities) were some of the worst performing sectors in the quarter.
The Federal Reserve raised US interest rates a quarter of a percent to 1.75% in March, stating that the economy can withstand at least 3 more rate hikes in 2018. Additionally, new Fed chairman Jerome Powell gave his first testimony to Congress, where he called for a steeper path to interest rate increases in 2018 and 2019. This policy commentary, coupled with inflation fears, caused fixed income yields to increase and bonds to sell off in the quarter.
Although this market cycle is getting long in the tooth, there are still indications that markets can go higher. The International Monetary Fund (IMF) recently increased their global growth forecasts for the next two years due to the stronger world economy. Impacts of the US tax overhaul are still rippling through the economy, and first quarter earnings are expected to be promising. Further, corporate mergers and acquisitions activity is the highest since 2000, an indication the business climate is favorable.
As we were stating for the better part of last year, volatility is back. In the first quarter, there were 23 times when the S&P 500 index closed up or down 1 percent or more. For all of 2017, that happened eight times. As unpleasant as the increase in volatility may be, it’s completely normal and healthy for functioning financial markets. We would remind investors that last year was an anomaly from a volatility perspective, with subdued volatility being the outlier. While geopolitical tensions have taken a back seat, other concerns have come to the forefront. The potential of an overheating economy and a possible trade war with China help to emphasize our belief that a diversified portfolio can help buffer market swings in the short term, helping you stay invested in the markets while reaching your goals over the long term.
This material is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Madison Wealth Management does not provide tax, legal or accounting advice. Actual economic or market events may turn out differently than as presented above. © 2018 Madison Wealth Management