During the first quarter of 2018, the stock market, as measured by the S&P 500 Index, had a total return of minus 0.8%. Despite the roughly flat performance for the quarter, volatility spiked to levels not seen in several years. January started strong, as the market surged 7% to start the year, but it quickly reversed itself, dropping into negative territory less than two weeks later before recovering modestly. While 2017 saw volatility fall to all-time lows, this year has seen it return with a vengeance.
Given rising volatility, what should investors expect going forward? We’ll attempt to answer that by revisiting the key questions we posed last October. In addition, we’ll explore an important secular trend, namely the expanding role of technology and its impact across the economy.
The key questions are as follows:
- Can the economic expansion continue?
- Can inflation remain quiescent?
- Will the Federal Reserve (the Fed) be measured in tightening monetary policy?
- Are equity valuations too high?
In the last six months, the global economic expansion accelerated, driven by growth in both emerging and developed markets. In addition, both consumer and business confidence hit new highs. In March, the Michigan Consumer Sentiment Index improved to 101, the highest level since January 2004. According to Evercore ISI, this confidence is broad-based with strength across consumers, builders, CFO’s, small businesses and big businesses. Economic strength is driving job creation, lowering unemployment rates and causing more people to enter the workforce.
We are closely watching developments in Washington D.C. The recent tax cut and the newly adjusted tax laws that allow for faster expensing of capital investments will likely add a tailwind to the economy by spurring spending on capex later this year. Despite concerns about potential trade disruptions and the risk of accelerating inflation, we believe the U.S. economy is in good shape going forward. We do not believe that President Trump’s protectionist trade rhetoric will actually result in economic slowdown and higher inflation. The recently announced tariffs may not have much impact if they are limited in size and very targeted. At this time we do not see Trump’s bluster leading to a full-blown trade war, the consequences of which would be ugly.