Commentary on the Market: 1st Quarter Update 2018

What a difference a few short months make. The markets’ behavior in 2017 was so different than in the first quarter of 2018. 2017 was a remarkable year for the S&P 500 and the Dow Jones Industrial Average with both stock indexes eclipsing gains of over 20%. Although the small company indexes lagged their larger peers, they still logged gains of over 10%. All of this was done with relative calm. The first quarter of 2018 has been the complete opposite. The markets were off to a good start with immediate gains. However, February and March saw most of the early year gains disappear in a market riveted with extreme volatility.

What caused the pendulum to swing in the opposite direction and why so much volatility? For one, the markets had run virtually unencumbered for a full year with limited volatility. Political commentary regarding international commerce and the possibility of a U.S. trade war with China has created uncertainty in the markets, especially with those companies that would be impacted  by higher tariffs on trade. Ultimately, the consumer ends up suffering from higher prices. Additionally, the escalating tension with Russia is creating an atmosphere that harkens back to the hostility between the U.S. and Soviet Union during the Cold War. Additionally, major names in the tech industry are facing issues related to hacking and the data protection of the consumers that use their services. These concerns have caused much volatility within the tech sector.

Despite the uneasy atmosphere that we are currently experiencing within our markets and the tensions that appear widespread around the globe, our economy remains strong. We can’t predict the eventual outcome of the tariff threats between the U.S. and China, but hopefully we will have a productive resolution. An old saying says “nobody wins in a headbutt.”

Our economy continues to grow. We just recently received a final reading of the year end 2017 Gross Domestic Product (GDP). It grew between October and December at an annualized rate of 2.9%, with consumer spending contributing in a big way. Because of this growth, the Federal Reserve Bank has continued to support the policy of gradually raising rates in order to keep our economy from overheating thus controlling inflation.  Consumer Sentiment reached a 14 year high in March signaling that spending was on the rise. Personal income has risen 3.7% over the past 12 months. The unemployment rate continues at 4.1% with some industries experiencing difficulty in finding personnel to fill key jobs. This is one factor fueling wage growth.

I have confidence that our markets will settle down as the political rhetoric calms. I do not remember a time during the 31 years that I have been an investment advisor where the markets have not had to face head on the impact of decisions and disagreements coming in from Washington and other capitals around the globe. Most notably within the past decade and half we have been involved in several wars and have watched our government change parties and leadership roles, with each doing their best to create problems for the American people. We have observed numerous economies around the world near economic collapse and still our economy rebounds and continues to prosper as we are seeing now. As our economy continues to grow and consumer spending remains strong, we should see the equity markets rebound accordingly.

As always, I am available to answer any questions that you may have.

Sincerely,
Ruben Guerra