Sometimes it seems like you are spinning your wheels and never get anywhere or to put it another way you seem to be going in circles. That kind of describes the markets this year. Yes, January and February saw big moves – first to the upside and then to the down. Since then, however, the moves have been somewhat similar but on a much smaller basis. The good news is that volatility has settled down a bit – not to last year’s levels by any means but less than February’s levels. Is this good news or bad or just a pause before some major moves later this year? First, the markets and then we’ll briefly try and tackle those questions.
April saw the markets rebound a bit (just a bit mind you) from March. The major indexes, whether stock or bond, are all within positive three percent and negative three percent with the end result being a fairly flat year so far for a balanced portfolio. Small cap stocks have benefited the most and not because of a perceived tech or biotech heavy nature. The primary reason is likely a political one – all the talk of tariffs and a trade war tends to impact multi-nationals more than it does smaller domestic companies. Another factor is the impact of the tax cuts and how those same businesses might be able to take advantage of the savings in a more beneficial fashion than their larger counterparts. In any event, the general feel is sideways for stocks and somewhat negative for bonds due to rising inflation and interest rates. For more information see the data at the end of this commentary.
The markets are seemingly getting nowhere fast right now. That can be construed as a good thing or a bad thing depending upon how you look at it. On the positive side, the trade war talk, rising interest rates and inflation, and various geo-political events haven’t derailed the stock market. This would typically mean that fundamentals are driving the force right now and normally that is a very good thing – especially in an earnings environment like we are in right now. The sideways movement can also, over time, essentially act like a mini-correction or pull-back in that it allows the markets to take a breath before moving higher without the dramatic effects of a prolonged correction. On the negative side, sideways movements can last for extended periods of time and become frustrating as the days go by without seeing any positive ground gained. The down days tend to feel worse than the up days feel good and a negative tone sometimes settles in on investors. This can end up causing the markets to turn more negative than they should as some investors throw in the towel and give up. Fundamentals can play a part as well as investors digest current earnings in light of future expectations and if the outlook isn’t as rosy as expected or seen in the current numbers then stocks can be punished or at best continue their sideways movement.
Why this is important right now is because we are in the midst of earnings season and the vast majority of companies are reporting strong earnings growth (in fact the numbers are over 20% growth year-over-year for many of them) which should be driving the markets higher and perhaps strongly so. So, why the sideways movement? Well, it has less to do with the actual current earnings but more to do with future expectations. For instance, Caterpillar (symbol CAT) recently came out with their earnings report and basically blew the doors off. Stock should have jumped higher, right? Wrong. During the earnings call with analysts their leadership reported that this might be the high water mark and that their outlook may be somewhat less than the current earnings might indicate. Stock drops. So, fundamentals are playing a role but the results are a mixed bag which leads to the markets going nowhere fast. Throw in all the usual items that impact the markets….the Fed, political and geo-political talk and events, inflation, etc. and the good news is balancing out the perceived negative news and the wheels just spin but don’t gain any traction.
We do share some concern that the markets may see periods of volatility going forward primarily due to the usual suspects described above but also to the aging bull market and economic expansion. Talk of an inverted yield curve is back in the news and with that comes talk of the potential for a recession. There really is no basis for that talk right now but that could change over the next twelve to eighteen months and along with it comes market volatility and uncertainty. To that end, we feel that it is important to be true to our way of investing….whereby we are concerned about protecting the downside first and then gaining what we can on the upside. To that end, you may see us make some adjustments to portfolios as we feel are warranted such as introducing lower volatility investments on the equity side and utilizing bond or CD ladders on the fixed income side where and when appropriate. As usual, we will continue to monitor the news and economic developments and make adjustments when necessary.
If you are concerned over current market conditions or haven’t had a formal review in some time, now would be a great time to stop by our office in Madison or call our Wealth Management department at (608)826-3570 to schedule a portfolio review.
As of April 30th, 2018…..
Dow Jones Industrial Average down -1.63% YTD Barclays U.S. Agg. Bond Index down -2.19% YTD
S&P 500 down -0.38% YTD EAFE down -0.35% YTD
S&P 400 down -1.03% YTD Inflation (CPI) 2.4% (as of March 31st)
S&P 600 up 1.60% YTD Unemployment 4.1%
NASDAQ up 2.67%
Thank you for your business – we look forward to speaking with you soon. (Note – this commentary used various articles from Morningstar, the Wall Street Journal, Investor’s Business Daily, Northern Trust, CNNMoney.com, msn.com, Kiplingers.com, nytimes.com, Fidelity Investments, American Funds, LPL Financial and other tools as sources of information)