First Quarter 2018 Review and Outlook

The first quarter of 2018 certainly saw stock market volatility return.  Stocks rose sharply in January but slid the rest of the quarter.  After the dust settled, the S&P 500 lost about 0.8% for the quarter.  There were few places to hide as International Developed Markets fell about 1.2% and even the Aggregate Bond Market Index fell 1.5%.  One standout was Emerging Markets, which managed to rally 2.5%.

Interestingly, this volatility coincided with a robust and improving earnings picture.  The culmination of world-wide economic growth and the big corporate tax cuts should propel corporate earnings throughout 2018.  Per Factset, analysts are projecting 2018 earnings growth of 18.5%, on revenue growth of 6.7%.  The forward PE of 16.1 (just a tad over the 10-year average of 14.3) may even be considered cheap considering the low interest rate environment.    

Breaking down the quarter in the US market, Growth continued the recent trend of beating Value by a wide margin.  (S&P 500 Growth Index +1.9% vs S&P 500 Value Index -3.6%).  Sector winners were Technology and Consumer Discretionary.  Losers were Telecom, Consumer Staples and Energy.  Expect these trends to continue, although Energy stocks should find some buyers with the wide gap between the steady performance of energy commodities and the weak price of shares of energy companies.

Interest rates have also been newsworthy.  As the Fed’s tightening cycle continues, longer term bond yields have risen. The Benchmark 10-Year Government bond rose from the 2.3% range last quarter, almost touching 3.0%, but settling around 2.8%, hurting the value of bonds.  With the higher yields, longer term bonds are becoming more attractive, so we are looking for opportunities to move investors, having waited in short-term vehicles, to longer duration securities