First Quarter Market Review
John Fischer, CFA®, CFP®
April 17, 2018
Where Investing and Golf Intersect
Golf is a challenging sport that requires serious focus and concentration. The goal is simple, but not easy: to hit a small ball with a long club, send that ball hundreds of yards into the distance, and have it land at a precise spot.
Then, do it over and over again. And if you play golf with friends like mine, they’ll throw in the added challenge of forcing you to concentrate while cracking jokes during your backswing.
The point is, there’s not much you need to do to be a successful golfer. The challenge is not in figuring out some complexity, but in doing something very straightforward with exacting precision. More importantly, the challenge is in doing something with precision consistently.
In that way, golf is a lot like investing.
The first quarter of 2018 could serve as a good reminder about the true challenge with investing that we all face: staying consistent with simple but precise actions that must be taken over and over again to be successful.
Even in the best of markets, it can be difficult to be a disciplined investor who remains focused on your long-term financial goals. But just like when your buddies start crowing in the middle of your golf swing, adding in a flurry of background noise via market volatility and fluctuation makes the task of being a disciplined investor exponentially more difficult.
The Impact of “Noise” on Investors
The noise that was the market volatility of the first quarter of 2018 was much louder than what investors heard throughout all of 2017. For some, getting used to hearing that distracting, unpleasant “sound” has been a tough adjustment.
During the first few months of the year, we saw the stock market incur its first 10% correction in nearly two years. That’s in stark contrast to 2017, when 3% was the largest decline we saw all year.
In 2017, the S&P 500 only had 8 days in which it closed up or down by more than 1%. Compare that to the first quarter of 2018, when the S&P 500 had 23 days like this. Investors have been forced to embrace a new normal so far this year.
Did We Have Too Much of a Good Thing?
Stocks got off to a fast start in 2018, up more than 5% in the month of January as they picked up where we left off in 2017. The onset of market volatility was actually sparked by a strong jobs number in early February that was better than the market expected.
The strength of this key economic indicator ignited investor concerns that inflation was beginning to rear its ugly head. These inflation fears caused the stock market to lose its footing and stumble into its first correction in nearly 2 years.
One, Two, Three, Four; I Declare a Trade War
Just as the market was recovering from that inflation scare, the White House announced plans to add tariffs to all steel and aluminum imports. That sparked investor concerns over a trade war.
Soon after this announcement, the White House announced substantial tariffs targeting Chinese goods on account of China’s unfair trade practices and their theft of American intellectual property.
Less than a week after the steel and aluminum tariffs were released, the White House announced plans to exempt Canada and Mexico from the tariffs. Soon after, the entire European Union was added to the exempt list with more countries expected to come.
That’s part of the reason why we don’t believe the current Administration is interested in a massive trade war in which there would be no real winners. As the exemptions to the steel and aluminum tariffs illustrated, we believe these tariffs were created as part of a larger negotiating strategy as the U.S. attempts to improve existing trade agreements.
While a full-fledged trade war is unlikely in our view, we do expect the recent market volatility to persist for some time as ongoing trade negotiations take place.
The Difference Between High Rates and Rising Rates
Given the economy continues to grow moderately and the Fed announced another rate hike in March, some investors have started to worry about the potential effects of rising interest rates and the potential negative ramifications on the economy and stocks. This is a good time to point out there’s an important distinction between high interest rates and rising interest rates.
High interest rates can be a major liability to an economy. High rates increase borrowing costs for individuals and businesses which can reduce their inclination to spend. That, in turn, can cause an economy to slow or contract.
But this isn’t an accurate picture of where we sit today. Following the Great Recession, interest rates fell to historically low levels. While interest rates, both short-term and long-term, have risen from their post-recession lows, they still remain well below their long-term averages.
Most importantly, interest rates are not at levels that would significantly restrict economic growth. We expect rates to rise slowly over time as the economy expands, but the moderate pace of economic growth and current inflation level (which still remains below the Fed’s 2% target) indicate a rapid rise in interest rates is unlikely.
The Takeaway: Opt Out of the Noise
The volume of volatility in the first quarter raised a great deal of clamoring about the market. It took the noise to a level that, as an investor, you might not have experienced in some time.
The S&P 500 finished the quarter in negative territory for the first time since 2015, and only the second time in the past 5 years. Given the ongoing concerns of a trade war, we expect the market to remain fairly noisy as we move into the summer months. The relative quiet of 2017 seems to be but a distant memory.
We know there’s been an increase in market noise. But that doesn’t change what you should be doing to achieve your financial goals: focus on what you can control.
Make sure the riskiness of your portfolio aligns with the time horizon of your financial goals and your tolerance for risk. Rebalance when appropriate. Stick to your strategic, rational investment plan (while tuning out emotional impulses).
The best golfers demonstrate the ability to focus and concentrate on their primary objective while tuning out all the noise and distractions around them. The best investors do the same thing.