It is safe to say the market was still in a corrective phase last month. Whether it was renewed fears surrounding future trade policy, or investor anxiety about technology darlings Facebook, Amazon, and Tesla, stocks continued to experience elevated levels of volatility. As March drew to a close, the S&P 500 had declined 2.54%, and the technology-heavy NASDAQ was off 2.79%. Somewhat surprisingly, the small stocks in the Russell 2000 held up well, actually gaining 1.29%. New Federal Reserve Chair Jerome Powell hosted his first meeting, which went largely as expected. The federal funds rate was increased another quarter percentage point, with a forecast of two to three more hikes through year-end.
RYAN PATTERSON, CFA, CFP®
CHIEF INVESTMENT OFFICER
If you watch the financial headlines at all, you have likely picked up the sense of “Panic!” that has dominated the last few weeks’ reporting about the stock market. Words like “tank,” ”crash,” and “meltdown” have picked up frequency in the press. We suspect the question has crossed the minds of our clients as to what L&W’s attitude is during recent weeks, so I wanted to share with you a quick synopsis of what we’ve been discussing in our Investment Committee meetings during the past 6-8 weeks.
It has to end eventually. The S&P 500 fell 3.69% in February, the first month of losses since way back in October of 2016. Rising interest rates may have been the proximate cause of the pullback, but after 15 straight months of winning, the market might simply have been due to take a breather. From their highs on January 26th, stocks did drop just over 10%, marketing the first official “correction” since early 2016. This pushed the S&P 500 into negative territory for the year temporarily, before a late-month rebound recovered some of the losses. The 10-Year Treasury yield ended February at 2.90%, the highest since 2013.
Markets kept on rolling in January as the S&P 500 gained 5.73%, the 11th best start to a year since 1950. In general, good Januaries foreshadow good calendar years overall. In 9 out of the 10 instances where January market returns were better than 2018’s start, stocks continued to rise for the duration of the year. Emerging market equities were hot as well, having gained 8.33% already. If there were any weakness to be found, it was in fixed-income securities. Rising interest rates took their toll on bonds, and the Bloomberg Barclays Aggregate Bond Index, composed of investment-grade U.S. bonds, fell 1.15% last month.
A good December capped off a great year for stock markets. In fact, thanks to last month’s 1.11% rise, the S&P 500 actually provided positive performance for all 12 months of 2017! International and emerging markets were similarly consistent, with only one down month on the year for each. On the domestic policy front, President Trump signed sweeping tax legislation, which should boost corporate earnings in 2018. Also, the Federal Reserve raised the federal funds rate another quarter point to its new range between 1.25 – 1.50%
U.S. stocks rallied strongly towards the end of November, as corporate tax reform began to look more and more like a reality. The S&P 500 rose 3.07%, bringing its year-to-date gain to 20.49%. International and emerging market equities turned in decent performance as well, up 1.05% and 0.20%, respectively. Despite the continued favorable stock market trends, there has been little movement in longer-term interest rates. The 10 year treasury yield seems unable to break above the mid-2.4% range, ending the month at 2.42%. Next month, the Federal Reserve is expected to raise the federal funds rate another quarter of a percentage point.
Typically one of the worst months of the year for stocks, this past October was anything but. The S&P 500 rose 2.33%, bringing its year-to-date gain to nearly 17%. The technology sector continued its winning ways, with the NASDAQ up 3.61% for the month and just over 26% thus far through 2017. Not to be outdone, emerging market equities rallied as well, and have now delivered 32.26% on the year! President Trump announced his nomination of Jerome Powell for Federal Reserve Chair beginning in 2018. Mr. Powell has similar views on monetary policy compared to the outgoing Janet Yellen, so we don’t expect many changes to current course of policy in the near-term.
Financial market strength continued in September, capping off a 3rd quarter in which most asset classes registered healthy gains. U.S. stocks fared well, with the S&P 500 up 2.08%. Small cap securities, as measured by the Russell 2000, were even better, rising an impressive 6.24%. Emerging market stocks took a breather, pulling back about half a percent over the past month, but have still gained nearly 30% for the year. In a bit of a surprise, the Federal Reserve indicated that one more interest rate hike in December was still the most likely course of action, despite relatively muted inflation.
QUARTERLY MARKET COMMENTARY : Third Quarter 2017
“Keep it 100,” that’s what all the kids are saying on social media these days. But what in the world does it mean? Just when we think we’ve begun to understand the differences between Instagram and Snapchat, millennials start talking in code. Anyhow, urban dictionary defines the phrase as “staying true to oneself…no matter what anyone else thinks.” As it so happens, the U.S. economy is now entering its 100th month of expansion. And this long-running growth has been largely driven by Americans staying true to themselves, doing what it is that they do best – buying stuff! In the second quarter of this year, for example, consumer spending grew 3.3 percent, a nice rebound from just 1.1 percent in the first quarter. This helped overall GDP increase at a solid 2.3 percent annual rate through the first half of the year. Back-to-back severe hurricanes make recent data more difficult to interpret; still, these positive underlying trends look stable, with the Atlanta Fed currently pegging third quarter growth at 2.5 percent.
Second quarter U.S. GDP got a nice revision, coming in at a 3 percent annual rate versus the previous estimate of 2.6 percent. On the other hand, geopolitical events, especially a number of missile tests by North Korea, led to increasingly volatile financial markets. The S&P 500, however, still managed to eke out a 0.31 percent gain in August. Emerging markets continued their hot streak, gaining 2.23 percent for the month, bringing year-to-date returns up to nearly 30 percent! Gold moved higher and treasury yields turned lower amidst the hectic stock market. The 10-Year U.S. Treasury yield ended August at 2.12 percent.