Weekly market update
With the first quarter of 2018 in the books, the Dow is down 1.96%, the S&P 500 is down 0.76% but the NASDAQ finished up 2.59%. The extraordinary start to the year where we saw new highs for all of the major averages has since faded and the one theme front and center on investor’s minds – volatility!
Over the first quarter, the S&P experienced 6 trading days of +/- 2% moves. In 2017, we saw zero trading days with such moves. It has turned out to be a bumpy ride for stocks investors.
Confusion is the name of the game and while there is never really any long-term clarity, the markets always do better if it senses that we are on the right track and the spike in volatility of late suggests that we may not be. 3% up or down moves in the broader market in one day are NOT common, nor should they be.
The first fly in the ointment happened after the January jobs report. Wage inflation rose at its fastest pace since 2009 and that sent bond yields soaring and stocks tanking. Why? Inflation had been in absentia for years and higher inflation would give the FED more room to hike rates. The 10 year U.S. Treasury yield that started the year off around 2.4% peaked at 2.95% and finished the quarter at 2.74%.
The very next week, the volatility slammed a number of inverses and leveraged ETFs and that sent a wave of panic in the markets – we saw the Dow fall almost 1600 points in one day. Stocks regained their footing and climbed out of correction territory and then the President announced tariffs and that set off talk of the worst trade war since the Great Depression! Three months ago, we couldn’t even spell trade wars and now it has climbed the “wall of worry” in rapid fashion.
We, once again, shook off the bad headlines and once again erased February’s losses! And then news broke of a massive data breach at Facebook and at the same time the President vowed to take on Amazon and it was look out below for tech stocks and that brought the broader markets along for the ride.
We were in the best environment for global trade in more than a decade and the economic trade and the earnings backdrop are the best it’s been in a very long time. Earnings expectations for the first quarter are expected to rise by 18% led by tech, financials and industrials. Tax reforms were expected to be a big boost to U.S. companies and we have seen the evidence of that. And Poof!
Oddly enough, the geopolitical landscape is the only shining star right now as North Korea’s leader is finally playing nice – we’ll see how long that lasts.
So where do we go from here?
April tends to be one of the better months for stocks, but that could come into jeopardy this year.
The market leaders are under pressure and it’s a situation where the proven winners for the past few years are faltering. When that happens, there is a negative psychological sense in the markets.
And, the bearish narrative surrounding tariffs implemented by the Trump administration could spur a global trade war that would spiral the world into a recession. We understand the fear. We get how bad a global trade war would be on future profits.
Speaking of profits, analysts are expecting the most earnings growth we’ve seen in years and if this fails to play out, it could get ugly.
If that’s not enough:
- There are concerns of a slowdown in China and Europe.
- The FED’s balance sheet.
- Credit spreads have widened rapidly and they were the leading indicator of the Great Financial Crisis.
- Interest rate rising too fast or too high could dampen corporate profitability.
- Oil prices continue to rise.
I suggested in last month’s review that this could turn out to be an interesting spring – I may have underestimated.
Stay tuned and we’ll keep you posted.
Todd Day, Portfolio Manager
Horizon Financial Services, LLC
April 3, 2018
