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Quarterly Commentary – March 2018

The U.S. Equity markets exhibited significant volatility during the first quarter of 2018 in sharp contrast with the lack of it in 2017. January started off on a very strong note, only to give up the gains quickly during the first week of February. The rest of the quarter was followed by continued tumultuous activity. The following are performance numbers from various popular indexes. Please remember index numbers are not individually comparable to a properly diversified portfolio. Each portfolio may include an allocation to securities similar to these indexes in varying amounts based on your personal risk tolerance and should only be compared in that context. The S&P 500 was down 0.76% for 2017. The Dow Jones Industrial Average was down 1.96%. The Nasdaq Composite Index was up 2.33%. The Russell 2000 Index was down .08%. International equities as represented by the MSCI World Ex U.S. Index were down 2.19%. Fixed Income as represented by the Barclays Aggregate Bond Index ended down 1.46% for the year.

The spike in volatility appears to have been technically-driven rather than the beginning of a change in trend or based on some major fundamental change. This was driven in part by reactive computer trading and the use of volatility-linked trades by institutions. Trade war concerns, Treasury yields ticking higher, inflation concerns, and the resulting U.S. dollar under pressure were a trigger for equity market sell-offs. More recently, adding to that were the concerns about social media firms on their use or misuse of data which could translate into stricter government regulation in a prominent area of the equity markets. A more hawkish tone from the Federal Reserve on the future of interest rate increases also played into dampening the mood for the equity market.

Despite this, the economy still looks strong and earnings which will start to come out in April should be solid.
Until the release of company earnings, the market can remain vulnerable to the news cycle as more clarity on some of these mentioned concerns get sorted out. Earnings are expected to be strong as this will be the first quarter to see benefits from the tax reform. Protectionism concerns will likely remain the wild card near term. The outlook for the most part is based on a GDP growth expectation that remains above-trend in an environment with inflation that is still under control near term.

Overseas, the major issues on the Brexit transition have been resolved. European growth appears to have faltered somewhat since peaking in January. One of the questions asked is whether globalization may have peaked and is now going into reverse and the resulting impact on the various economies. Rather than sharing similar goals and priorities, there seems to be a new appreciation of national, political and cultural differences. An interesting recent development in China with President Xi Jinping is the removal of limits to his term in office. Is it a dictatorial power grab or an attempt to create stability to enact further necessary reforms? Time will tell. Growth indicators are at cyclical highs and central banks are starting to look at raising interest rates from historic lows. Tighter monetary policies will likely be felt as a drag on economic growth and risk assets on the global front at some point.

It is almost impossible to time the markets and it is best to resist the urge to sell based on recent market movements. Market volatility can be unnerving, but it is normal and often time short-lived. It is part of investing. Investors tend to lose big picture perspective on the behavior of markets. That is a psychological effect that plays itself out on human perception. This for the most part has been business as usual. The media likes to describe market activity in terms of point movements in the indexes. The big fallacy is that points today versus ten years ago are not comparable. Records being broken using point movement calculations are meaningless. Only percentage changes are relevant. Seems that it is just one more way that the media tries to generate headlines. Don’t be fooled by it.

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