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The first quarter of 2018 ended with its first negative quarter in the last 10 quarters. The first thing to mention is we are not afraid of negative quarters. Out of the 113 quarters since 1990, we’ve had 31 end negative, which is more common than 1 out of every 4. If you take away times when we are in a recession, since we currently are not in one, we have 99 total quarters with 22 of them ending negative; just less than 1 out of every 4. So the likelihood of a negative quarter somehow signaling a more economic issue is extremely low. The problem for investors is that we have gotten used to positive quarters. Before this quarter the last 20 quarters have only produced 1 negative. That’s a 1 in 20 verses a more normal 1 in 4. Even adding this last one we are well below our longer-term average. Investors don’t like a change reverting back to a more normal environment, especially since it means seeing more red in our statements; but with the 2.54% loss in the S&P 500 for March, that’s exactly what we got1.
What may have made this an even harder quarter is the fact that the U.S. bond index also posted a negative quarter at -1.18%1,2. The positive return in March of 0.94% couldn’t overcome the first two months of the year. This however also is not a complete anomaly. Of the 22 non-recessionary quarters where the S&P 500 ended negative, 7 of them (31% of the time) included negative returns from the bond market. This time around we can safely say that the Fed’s slightly more hawkish view on normalizing policy and the initial scare of wages increasing too fast (which really only was a scare in January) created somewhat of a shift in interest rates, causing bond prices to adjust accordingly. Since then the 10 year treasury has found a somewhat new range between 2.75% and 3.00%, rather than continued pressure upwards3. Our continued expectations is that the Fed will increase rates 3 times in 2018 on its path to normalizing the interest rate environment. We continue to support the fact that equities have shown positive correlation to increasing interest rates when the 10 Year Treasury is less than 5%4.
Shifting to trade tariffs, by far this was the most talked about news in the financial markets and practically every news outlet for the month of March. The main thing to keep in mind here is that the size of the trade tariffs being imposed on us verses the stimulus being created through fiscal reform is quite imbalanced…in our favor. So far with the total trade tariffs (as of April 9th) Strategus Research Partners estimates the total cost to the US is roughly $81 billion; a seemingly sizeable number for sure. However compared to the $800 billion estimated in fiscal reform, the financial impact of the trade tariffs are relatively small5. Also it has to be recognized that no tariffs have actually been put into effect. The most likely outcome is that these tariffs are used to negotiate a more free trade policy between countries like China. The still least likely outcome, however severe it could be, is that negotiations don’t work and China and the US push into a trade war. Currently we are not in a trade war. We are barely skirmishing. We much more expect the former and therefore look forward to what April may bring – solid earnings.
Besides April showers, we believe this next month will also bring another solid earnings report, which could in turn produce “May Flowers” in the global markets. Current consensus is a year over year increase of 18%, pushed favorably by the tax reform, manufacturing activity, and a weakening US dollar6. Global growth is also a hopeful headline this month, leading way to a more global push back to fundamentals. All in all, we believe solid earnings reports will hopefully be a way to push the focus away from the tariff distractions, and allow investors to focus on a healthy market and economic environment.
A reminder, if you have missed any of our Month-In-Reviews you can find them archived on our website at https://www.aghwealth.com/p/month-in-review.
Thank you for your trust and confidence.
LPL Financial Advisor
Vice President, AGH Wealth Management
1 Morningstar Direct™
2 U.S. Bond Index measured by the BBgBarc Aggregate Bond Index
3 Yahoo Finance: https://finance.yahoo.com
4 JPMorgan Guide to the Markets Second Quarter 2018; slide # 16
5 LPL Daily Research Morning Call Notes: 04/09/2018.
6 LPL Research Weekly Market Commentary, 04/09/2018
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. All indicies are unmanaged and may not be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.