The following are excerpts from the First Quarter 2018 “Investment Insights” report, produced by the Global Investment Management team. Read the full report.
The return of volatility
Volatility, the word that strikes fear into the minds of nervous investors, returned in the first quarter of 2018.
After a strong start to the year, stock markets experienced sharp swings when volatility made its palpable comeback. Global stock markets ended the quarter down 0.92%, according to MSCI data, despite being up over 7% around the end of January. Domestic markets followed the same path before relinquishing any gains for the year, with the S&P 500 Index losing 0.76% in the first quarter.
A few different bouts of shakiness occurred during the quarter with the first seemingly the most jarring. Investor fears flared in late January over a strong employment number combined with a surprising jump in rates. That selloff appeared to be a harbinger of more to come as geopolitical concerns over international trade reared their heads and prices pulled back. International developed stocks lagged most other regions, losing 1.58% and over 4% in local currency terms as a weakening dollar aided some U.S. investors. Emerging markets were able to stem their decline after a resilient January, with the MSCI Emerging Markets Index gaining 1.24% for the quarter.
Who wants a trade war?
Most of the instability in financial markets over the last few months arose from the potential for a trade war between the U.S. and China.
As with many policy clashes, the initial movements toward a policy battle started small and some time ago. As President Trump took office, he directed the Department of Commerce to investigate imports on foreign steel in April 2017, and months later internally probed China’s trade practices. The first open act of the potential trade war occurred in January of this year when the president enacted tariffs of up to 30% on imported solar panels and washing machines. Shortly after, the U.S. Commerce Department concluded its almost year-long study that resulted in a recommendation to employ tariffs or quotas on steel and aluminum in the interest of national security.
While China was not even a top-10 supplier for U.S. steel imports in 2017, according to the Commerce Department, it is by far the largest steel producer and exporter. According to the World Steel Association, China made up almost half of the world’s steel production in 2017. The trade dispute truly escalated when both countries announced tit-for-tat plans for $50 billion in import levies, followed by President Trump upping the ante by declaring potential tariffs on an additional $100 billion of Chinese goods.
Powell’s precarious position
Jerome Powell may have taken on more than he bargained for when he officially took office as head of the Federal Reserve in February. His predecessor, Janet Yellen, was fortunate enough to preside over a steadily improving economy and what could end up being the second half of one of the longest stock bull markets in history. However, all good things come to an end.
Historically, tightening policy from the Fed has been a precursor to an economic slowdown and an increase in financial market volatility. It may make sense for the Fed to tighten policy in order to pump the breaks on the economy and protect it from overheating – where inflation may run rampant – but it seems hard to avoid the pullback in growth that comes along with the policy change. This same scenario may play out in the coming years.
Read the entire Quarterly Strategy report from Q1 2018.
Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.
Diversification and asset allocation does not ensure a profit or guarantee against loss.
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