Market Commentary: Q1 2018Submitted by Axis Advisors LLC on May 15th, 2018
Global stocks got off to a solid start in January, but February brought a new level of volatility to the markets which has not been seen for quite some time. The synchronized global growth story of 2017 seems to be somewhat challenged in Q1 of 2018 with the presence of several uncertainties surrounding inflation, trade policy, and political tensions. As we continue in one of the longest bull markets in history, it will be interesting to see how markets react to Fed rate hikes, of which several are expected this year.
The jolt of turbulence that was introduced in February has reverberated across global markets through March, with global equities primarily in negative territory for the quarter. Global indices started 2018 strong with a 5.66% return in January, but reversed course over the following months, posting a 0.84% loss in Q1 according to the MSCI ACWI. To keep things in perspective, this was the first negative quarter for the MSCI ACWI since Q3 of 2015. Emerging markets have led the way in 2018, gaining a modest 1.47% according to the MSCI Emerging Markets Index. In the U.S., tech stocks continued their strong performance from 2017, with the NASDAQ Composite up an impressive 2.59% on the year. The S&P 500 Index slightly trailed the MSCI US Broad Market Index with year-to-date losses of 0.76% and 0.61% respectively, while the Dow Jones Industrial Average posted a 1.96% loss over the same period. International Developed markets turned in a loss of 1.41% in Q1, and have not quite recovered from the volatile month of February which resulted in a drop of 4.50% according to the MSCI EAFE Index. Fixed income indices are having a tough time thus far in 2018 with the Bloomberg Barclays Global Aggregate Hedged Index down 0.12% and the Bloomberg Barclays US Aggregate Bond Index down 1.46%.
According to the Morningstar U.S. sector indices, technology is the clear leader of the pack with an impressive 3.69% return in the first quarter. The Consumer Cyclical sector continued positive performance from 2017 which turned in a year-to-date gain of 3.39%, while Healthcare was essentially flat with a small loss of 0.75% over the same period. The laggards have all posted losses of 3% or greater in Q1, including Real Estate, Utilities, Basic Materials, and Consumer Defensive.
Perhaps the most notable event this quarter was the Dow Jones posting its largest one-day point drop in history on February 5th, falling 1,597 points (-6.26%) during trading hours. This was considerably greater than the previous record drop, which was a plunge of 1,089 points (-6.60%) on Aug. 24, 2015. Mainly triggered by inflation fears, February was the worst month in 2 years for both the Dow Jones and the S&P 500 indexes. Many investors worried that the tax cuts passed in December 2017 may cause an already strong U.S. economy to overheat, potentially causing the Federal Reserve to raise interest rates at a more aggressive pace than previously planned.
Coincidentally, February 5th was also when Jerome Powell was sworn into office to replace Janet Yellen as the new chairman of the Federal Reserve. Powell, a former Fed governor, is expected to possess a similar style of transparent leadership as Yellen, which he expressed in the quote, “As I begin my term, I want to stress my commitment to explaining what we’re doing and why we are doing it.” Mr. Powell seemed to take a more hawkish stance during his Humphrey Hawkins testimony on March 1st where he stressed the importance of not getting “behind the curve,” and thus having to raise rates too quickly in the event that inflation picks up.
On the economic front, the inflation data and unemployment metrics have been a positive sign for risk assets in the first quarter. Inflation worries have dampened after a solid February inflation report, which showed the Consumer Price Index (CPI) gaining a modest 0.2% in February, and the year-on-year increase in core CPI remaining unchanged in February at 1.8%. Additionally, the U.S. economy remains at full employment with February’s unemployment rate holding at 4.1%, and average hourly earnings rising a steady 2.6% on an annual basis in February. Against the backdrop of a tight labor market and strong economy, on March 21st the Fed raised the federal funds rates by a quarter of a percentage point to a range of 1.5% to 1.75%. One of the potential headwinds going into Q2 is the uncertainty surrounding shifts in global trade policy, particularly pertaining to the recent tariffs on aluminum and steel which were announced on March 8th by President Trump. Despite Trump’s willingness to be very flexible with U.S. allies, we will have to take a “wait and see” approach regarding any retaliatory trade measures other countries may impose on the U.S.
The 2018 Winter Olympics took place in February in Pyeongchang, South Korea, which is where a gesture of unity took place between North and South Korea as athletes from both countries marched together under one flag. Kim Jong Un sent his younger sister, Kim Yo Jong, to South Korea for the Winter Olympics, which was the first official visit from North Korea’s ruling party and taken by some to be a sign of improved North-South relations. Furthermore, in recent days North Korea has signaled that they are willing to denuclearize on the grounds that the military threat to the North was eliminated and its security guaranteed. This apparent change of attitude by North Korea is much welcomed, but is viewed with skepticism by US leaders as similar peace talks have failed with the Clinton, George W. Bush and Obama administrations. Future progress remains to be seen, as Mr. Kim and President Moon Jae-in of South Korea are set to hold a summit meeting in late April to continue negotiations.
We would be remiss not to mention cryptocurrencies, particularly Bitcoin, which captured so much attention in 2017 because of its explosive price appreciation. The price action of Bitcoin has been more subdued in 2018, in part due to regulation worries around the globe. In the US, the Securities and Exchange Commission (SEC) issued dozens of subpoenas in February to expand its crackdown on fraudulent Initial Coin Offerings (ICOs). In an ICO, a company raises capital by selling digital tokens that can eventually be redeemed for goods and services. If proper registration with the SEC isn’t required (which is currently the case), small investors can be potentially swindled by fraudulent companies. On March 7th, the SEC took further regulatory steps by issuing a public warning that “if a platform offers trading of digital assets that are securities and operates as an ‘exchange,’…then the platform must register with the SEC as a national securities exchange or be exempt from registration.” Following this SEC statement, Bitcoin dropped over 9% to a closing price of $9,780, which is markedly lower then where it began the year at $13,535.
Global factor performance has been a mixed bag to start the year, demonstrating the importance of factor diversification. In developed global markets, momentum and quality have continued to provide positive performance in the first quarter with gains of 2.58% and 0.17% respectively. Rounding out the global factors: small cap stocks and minimum volatility experienced losses in Q1 of 0.38% and 0.59% respectively, with value lagging behind with a 2.46% loss over the same period according to the MSCI ACWI factor weighted indices. Momentum holds firm as the leader in the U.S., global ex-US, and emerging markets.
Amidst the ever-changing geopolitical landscape and a return of volatility to global markets, the economy is in good shape as inflation maintains its smooth and steady “goldilocks” pace of growth. As previously mentioned, U.S. and global equity markets are having a relatively slow start to the year, but factor exposure is adding value across factors and regions. Symmetry Partners believes in taking a long-term approach to investing, and we believe investors should avoid making investment decisions based solely on short-term market movements. We like to refer to this as “staying the course,” which can become more difficult during periods of market volatility. Even during times when markets are growing, however, investors may become restless and begin searching for opportunities for greater returns. It is important to remember that as a whole, markets tend to trend upward and for now, equity investors should stand firm and stay well-informed on the events happening around us both domestically and internationally.
1 Fox, Michelle. “JP Morgan’s David Kelly expects four rate hikes in 2018: ‘The Fed is more hawkish today’.” CNBC, February 21, 2018.
2 Morningstar Direct, as of March 31, 2018.
3 Morningstar Direct, as of March 31, 2018.
4 Moyer, Liz. Hum, Robert. “Dow’s nearly 1,600-point plunge marks its biggest one-day point drop ever.” CNBC, February 5, 2018.
5 Egan, Matt. “February was an insane month for the stock market.” CNN, February 28, 2018.
6 Cox, Jeff. “Fed Chair Powell: No evidence of ‘decisive’ move up in wage.” CNBC, March, 1, 2018.
7 Mutikani, Lucia. “Gasoline, rents curb U.S. consumer price gains in February.” Reuters, March 13, 2018.
8 Borak, Donna. “Fed raises interest rates in Powell’s debut.” CNN Money, March 21, 2018.
9 Jackson, David. “Trump announces steel and aluminum tariffs, but with ‘flexible’ exceptions.” USA Today, March 8, 2018.
10 “Olympics: who is Kim Yo Jong, North Korean leader’s sister?” The Week, February 7, 2018
11 Sang-Hun, Choe. Lander, Mark. “North Korea Signals Willingess to ‘Denuclearize,’ South Says.” New York Times, March 6, 2018.
12 Robinson, Matt. “SEC Issues Subpoenas in Hunt for Fraudulent ICOs.” Bloomberg Markets, February 28, 2018.
13 Franck, Thomas. “Bitcoin just tanked below $10,000 after SEC says crypto exchanges must register with agency.” CNBC, March 7, 2018.
14 MarketWatch.com, Bitcoin USD Interactive Chart, March 7, 2018.
15 Morningstar Direct, as of March 31, 2018.
Symmetry Partners, LLC, is an investment advisory firm registered with the Securities and Exchange Commission. All data is from sources believed to be reliable but cannot be guaranteed or warranted. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, product or any non-investment related content made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may not be reflective of current opinions or positions.
Diversification seeks to improve performance by spreading your investment dollars into various asset classes to add balance to your portfolio. Using this methodology, however, does not guarantee a profit or protection from loss in a declining market. Past performance does not guarantee future results.
Index Disclosure and Definitions
Investors cannot invest directly in an index. Indexes have no fees. Historical performance results for investment indexes do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the occurrence of which would have the effect of decreasing historical performance results. Actual performance for client accounts will differ from index performance.
Dow Jones Industrial Average represents a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ.
S&P 500 Index represents the 500 leading U.S. companies, approximately 80% of the total U.S. market capitalization.
MSCI ACWI (All Country World Index) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets.
MSCI ACWI Value Index captures large and midcap securities exhibiting overall value style characteristics across 23 Developed Markets countries and 23 Emerging Markets (EM) countries. The value investment style characteristics for index construction are defined using three variables: book value to price, 12-month forward earnings to price and dividend yield.
MSCI ACWI Small Index captures small cap representation across 23 Developed Markets (DM) and 23 Emerging Markets (EM) countries. With 6,148 constituents, the index covers about 14% of the free float-adjusted market capitalization in each country.
MSCI ACWI Quality Index aims to capture the performance of quality growth stocks by identifying stocks with high quality scores based on three main fundamental variables: high return on equity, stable year-over-year earnings growth, and low financial leverage.
MSCI ACWI Momentum Index is based on MSCI ACWI, its parent index, which includes large and midcap stocks across 23 Developed Markets (DM) and 23 Emerging Markets (EM) countries. It is designed to reflect the performance of an equity momentum strategy by emphasizing stocks with high price momentum, while maintaining reasonably high trading liquidity, investment capacity and moderate index turnover.
MSCI ACWI Minimum Volatility Index aims to reflect the performance characteristics of a minimum variance strategy applied to large and mid-cap equities across 23 Developed Markets (DM) and 23 Emerging Markets (EM) countries*. The index is calculated by optimizing the MSCI ACWI Index, its parent index, in USD for the lowest absolute risk (within a given set of constraints). Historically, the index has shown lower beta and volatility characteristics relative to the MSCI ACWI Index.
MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the developed equity market (as defined by MSCI) equity performance, excluding the U.S. and Canada.
MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets (as defined by MSCI). The index consists of the 25 emerging market country indexes.
MSCI US Broad Market Index measures the performance of broad US equity market. It includes constituents across large, mid, small and micro capitalizations, representing most of the US equity universe. The index is free float-adjusted market-capitalization weighted.
NASDAQ Composite Index is the market capitalization-weighted index of approximately 3,000 common equities listed on the NASDAQ stock exchange.
Bloomberg Barclays US Aggregate Bond Index measures the performance of the U.S. investment grade bond market. The index invests in a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States – including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than 1 year.
Bloomberg Barclays Global Aggregate (USD Hedged) Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging market issuers. Index is USD hedged.
Morningstar US Technology Sector includes companies engaged in the design, development, and support of computer operating systems and applications. This sector also includes companies that provide computer technology consulting services. Also includes companies engaged in the manufacturing of computer equipment, data storage products, networking products, semi-conductors, and components. Companies in this sector include Apple, Google and Microsoft.
Morningstar US Healthcare Sector includes biotechnology, pharmaceuticals, research services, home healthcare, hospitals, long-term care facilities, and medical equipment and supplies. Companies in this sector include Astra Zeneca, Pfizer and Roche Holding.
Morningstar US Basic Materials Sector includes companies that manufacture chemicals, building materials and paper products. This sector also includes companies engaged in commodities exploration and processing. Companies in this sector include ArcelorMittal, BHP Billiton and Rio Tinto.
Morningstar US Consumer Defensive Sector includes companies engaged in the manufacturing of food, beverages, household and personal products, packaging, or tobacco. Also includes companies that provide services such as education & training services. Companies in this sector include Philip Morris International, Procter & Gamble and Wal-Mart Stores.
Morningstar US Consumer Cyclical Sector includes retail stores, auto and auto parts manufacturers, companies engaged in residential construction, lodging facilities, restaurants and entertainment companies. Companies in this sector include Ford Motor Company, McDonald’s and News Corporation.
Morningstar US Real Estate Sector measures the performance of mortgage companies, property management companies and REITs.
Morningstar US Utilities Sector measures the performance of electric, gas, and water utilities.
© Morningstar 2018. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.