The first quarter of 2018 was a tale of two markets. January brought more of the same steady equity market growth that we experienced throughout 2017. The S&P 500 Index had one of the best Januarys on record, largely on the back of the anticipated benefits of U.S. tax cuts announced in December and higher expected earnings-per-share for U.S. companies.
But this prolonged period of growth came to a sudden end in February and March when equity market volatility made a comeback. This increased volatility was the result of several unrelated events that took aim at the strong global economic backdrop.
First, incoming U.S. Federal Reserve Chair Jerome Powell announced an increase to the federal funds rate of 0.25%, raising the target range of 1.50%–1.75%. This was the sixth increase since the bottom of the U.S. interest rate cycle in 2015, with investors expecting two more increases in 2018 to help cool the U.S. economy.
Second, the U.S. imposed trade tariffs on China, and China subsequently retaliated with tariffs of its own. While we don’t believe these tariffs will lead to the all-out trade war some are predicting, we can’t yet say what the ultimate impact on the global economy will be.
Finally, investment technology darling Facebook faced a data breach scandal connected to Cambridge Analytica. Adding further instability to the information technology sector, Chinese company Tencent announced strong profits, but weaker-than-expected revenue, suggesting lower future margins.
All that being said, I believe it’s important to remember that market volatility is a normal part of investing, and it’s to be expected in the later stages of an economic cycle. Investors should expect more volatility in the weeks and months to come, but that doesn’t mean the current bull market is coming to an end. We’re still expecting continued expansion with a low probability of a recession over the next 12 months.
But if and when the bull market does come to an end, all of us at MD will remember that we’ve weathered major market declines before. I’ve personally been here for some significant market events, including the financial crisis of 2008–09, and I can say that the strategy we use to ride out market declines works.
As part of our plan, we build downside protection into our investment funds. So, our funds may not fully participate in strong bull markets, but they should fare better during a market downturn. We saw strong evidence of this playing out during the past couple of months, as our funds are generally exhibiting less risk than the broader market and are performing as expected.
I am confident that our funds will continue to perform as expected through the full market cycle and add value during any future downturn. My best advice to you is to stick to your long-term investment strategy and stay invested.
For a closer look at the return of market volatility and other factors that affected market performance this past quarter, and how this has affected our portfolio positioning, see our Q1 Macroeconomic Overview and Outlook.
If you want to know more about the trends highlighted in this report, and how they might affect your investments, I encourage you to talk to your MD Advisor.
President and CEO
You may also like