Volatility Returns
Following a year that provided excellent returns in the equity markets and the least amount of volatility that we’ve seen in the last decade, the first quarter of 2018 reminded everyone that investing is not always a smooth ride. In fact, ups and downs, as we experienced in the past three months, are common and considered by many to be healthy for the market. When the dust had cleared and all was said and done, the first quarter ended with the S&P 500 down 0.8%1. International developed equity markets also had a negative quarter, down 0.9%1, while emerging market equities were up nearly 2.5%1. Markets are typically forward looking entities and the recent volatility represents the uncertainty that is present in the mind of investors today. Does this bull market have room to run, or should we brace ourselves for rocky times ahead?
After the markets soared to all-time highs on January 26th, worries set in about the rising level of interest rates and inflation in the Unites States. For a brief period of time, the 10-year U.S. Treasury rate was approaching 3%, which caused some investors to flee the equity market and resulted in the first stock market correction (decline of 10%) in almost two years. The markets recovered over the following weeks only to fall again with the news that the U.S. would be placing tariffs on steel, aluminum, and several Chinese imports. While the U.S. exempted several countries from the steel and aluminum tariffs, a potential trade war with China has investors on edge as we enter the second quarter.
Despite the previously mentioned concerns, there is still a lot to be optimistic about when looking to the future. Strong global economic fundamentals and earnings growth continue to provide a tailwind for the markets. Companies in the U.S. will be reporting earnings over the coming weeks and expected earnings growth is the highest that it has been since 2011. Internationally, a weakening U.S. dollar could amplify returns, and earnings growth in emerging market countries remains extremely promising.
As always, it is important to have a plan in place and understand the thought process behind your asset allocation decision. For long-term investors, diversification is generally a winning strategy and it is important to stay the course in the equity markets. The upside of timing the market correctly is often much less than the downside of timing it wrong. For example, if you went to cash during the financial crisis in 2008, you would have missed out on an approximate 17,000 point gain in the Dow Jones industrial average over the past 10 years. Rather than attempting to time the market, we want to stress our belief that time in the market is the most important factor for investors to be successful.
Source:
1Morningstar