Greetings! I hope you are well. So far 2018 has certainly given us much to ponder. Trade, technology, and earnings are the headlines making the largest impression on both the markets and me.
Trade and tariff policies have roiled the markets on several occasions this year. At this juncture, markets are telling us they do not like additional tariffs and/or the possibility of trade wars. That being said, a pattern has emerged whereby the markets react negatively to news coming out of Washington, but then regain some lost ground as the broader implications and posturing is better understood. Welcome back volatility!
We have also seen a mounting backlash against big technology companies, highlighted by Facebook. This has led to multiple sharp sell-offs in the markets, particularly the technology heavy NASDAQ. The controversies driving this are nowhere near resolved and I suspect we will see privacy legislation emerge from Congress later this year.
Looking to the more immediate future, companies are about to start reporting earnings for the first quarter and expectations are very high. At present the estimated earnings growth rate for the S&P 500 in Q1 is +17%. That is the largest projected increase since 2011. This tells us analysts and companies are very optimistic about the role of the recent tax cuts. It also tells us that as expectations are met or not met, we could see more volatility.
The table below highlights returns for major asset classes, many of them negative. As the bull market ages, we will continue to diligently watch the stock and bond markets and look for opportunities in other areas as needed to dampen volatility and mitigate risk. Please don’t hesitate to call anytime.
2018 Q1 Returns for Key Asset Classes and a Diversified Portfolio:
|High Yield Bonds
|US Large Cap
|US Small Cap
|Diversifited (Defined as 60% Equity, 35% Bond, 5%Commodity)
Source: JP Morgan GTM 1Q2017