First Quarter Newsletter 2018
Since the major pullback in late January, domestic equity markets have been marked by volatility. Initially Energy, REITs, and Utilities were particularly vulnerable, as investors worried that Fed policy would continue to tighten. After a respite between late February and mid-March, when the market began to recover much of the earlier losses, we have experienced another round of selling, this time across a range of market sectors. NCAA Basketball is not the only place where madness reigned these last couple of weeks. Dorsey Wright reported in its 03/29/18 Sector Update that the Bullish Percent charts of 23 sectors in the DOW fell in the last week of March, only Utilities/Gas rose. Bullish Percent charts are used in technical analysis to determine whether a stock's Point and Figure chart indicates a buy signal. On April 2nd, Yahoo Finance reported 28 of the DOW 30 components were in the red.
Volatility is indeed back in the marketplace for the first time in a few years. We expect the swings up and down may continue for some time, as quarterly earnings, Fed action or lack thereof, developments in the International Trade arena, and the rate of economic growth, impact the stock market. This is an uncomfortable time to be invested in equities; but history has taught us the importance of maintaining exposure to equities over the long haul. Individual stock selection and diversification of assets become more critical. Positions in cash, gold, fixed income, and other assets whose performance doesn't correlate with the stock market can help blunt the impact of equity volatility, making it more comfortable to stay focused on your goals. During these times, we need to follow our discipline, take a time out to reevaluate positions, sharpen our defensive skills, and avoid emotional buying and selling. Those of us who followed March Madness this year know that the road to victory for many basketball teams was a roller coaster ride.
Significant pullbacks have been quite common over the last several decades, the average peak to trough in the S&P 500 from 1980-2017 was almost 14% and the lack of volatility from late 2016-2017 was highly unusual. (Lord Abbett 2/6/18) You will recall equity markets began a slow recovery from the economic crisis of 08-09, fueled by the Fed stimulative policy. When the Fed began unwinding their policy in 2014, the market moved pretty much sideways for a while. Andrew R. Willey IV, CFA, in the Feb. 06, Lord Abbett commentary states:
As quantitative easing come to an end in 2014, the equity market moved sideways for a nearly two-year period, as investors recalibrated their expectations for a new monetary-policy environment. . . In mid-2016, the equity market emerged from a year-long earnings recession, and stocks resumed their rally, powered by consistent growth in corporate earnings, completing the transition from a liquidity-driven to a bull market driven by fundamentals.
Positive earnings reports, lower unemployment, and continued consumer confidence were evident the first quarter of 2018 and cited by some market commentators as the reason for sell offs in January andearly February. They posited the economy is growing so fast, the Fed would need to become more aggressive with rates and watched closely. As we write this newsletter, Fed chair, Jerome Powell, is scheduled to speak Friday, April 6th. The tone of the Fed meeting in March was seen by many analysts as hawkish. We may see Powell move away somewhat from that tone.
Earnings reports in the first quarter were mixed, but overall continuing to show growth. Major automakers reported higher new car purchases for the month of March. Most equity analysts continue to predict growth in earnings as 2018 continues. So, while the defensive team is on the floor, we continue to see strength in long term fundamentals and are prepared for the opportunities that so often come from downside volatility.
In times such as this we are reminded of a quote from Lewis Carroll's novel, Alice In Wonderland; "the March Hare will be much the more interesting, and perhaps as this is May, it won't be raving mad -at least not so much as it was in March." "Mad as a March Hare" is a common British phrase. Perhaps the month of May will be merry for the stock market and lead us into a calm summer. Or perhaps the Mad March Hare may still be running amok. Whatever happens, we will be prepared. We will see how all this plays out as we leave behind an overly long winter, and head into May and June. We test our risk averse strategy often during times like these; our managed portfolios have held up well vs. the equity markets for the first quarter. Still, we know it isn't pleasant to see declines in portfolio values. Please don't hesitate to reach out if you are feeling uncomfortable.
Thank you so much for your confidence in us; we sincerely appreciate it, especially during times like this. We hope you will enjoy the warmth and sunshine of late Spring and look forward to seeing or chatting with you in the months ahead.
The Galarneau Group