Acumen Wealth Advisors Q1 2018 Market Insights Commentary

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As the first quarter of 2018 came to a close, one theme tops the minds of investors: the return of volatility. Over the course of the past three months, the S&P 500 experienced six trading days of +/-2% moves, juxtaposed to 2017 when we saw no such moves. This volatility has resulted in a bumpy ride for equity investors.

After starting the year off with a bang in January, U.S. Large Cap equities were down 0.8% through the end of March as investors absorbed the implications of trade tensions, higher interest rates, firming inflation, and fiscal stimulus. U.S. Small Cap equities did only marginally better, down 0.1% YTD, perhaps because of their smaller exposure to global trade dynamics. REITs remain the worst performers, down 6.7% YTD, reflecting their sensitivity to rising rates. Emerging market equities were a bright spot, up 1.5% despite volatility elsewhere due to improving and more resilient fundamentals in both economic and earnings growth.

We noted one frustrating aspect of the volatility. The media framed up this quarter with the phrases like “we are experiencing record-breaking point drops” or “Dow plunges, the biggest point drop in history.” This misleading news commentary can be very exasperating. In percentage terms, the Dow Jones industrial average’s -1,175 points on February 5th was the 25th worst one-day movement since 1960. Because the Dow, S&P 500, and NASDAQ composite have run up so much in the long bull market, comparing the point losses to earlier eras isn’t relevant. Percentage changes offer a better comparison. In percentage change, the Dow was down 4.6%. The Dow’s biggest one-day percentage loss was the 22.6% Black Monday crash on October 19, 1987. In point terms on this day, the Dow was down 508 points.

We feel current fundamentals will prove favorable for equities for the remaining part of the year. The fear of trade wars looms over the markets and, therefore, is worth addressing. The tariffs announced to date are relatively small and unlikely to have a significant impact on global growth. The tariffs have everything to do with politics and little to do with macroeconomic policy. For this reason, we do not believe there will be an all-out trade war. Instead, we will have a trade skirmish. To put it in perspective, if you add the five largest trading partners to the U.S. together, the average tariff for an export is 2.7%, while the average tariff for an import is 1.7%.

Truly, the biggest part of the deficit isn’t trade, but is actually government spending. It is important not to be distracted from the fact we have financed 17 years of war and massive government expansion with three tax cuts. Passing $20 trillion in outstanding debt is a problem that should be addressed. Unfortunately, neither party controls spending when put in power.

We look beyond the headlines and instead look for macro trends. It is important to remain focused on the fundamentals. Famed mutual fund manager Peter Lynch once quipped, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” Corrections can lead even the most steely-nerved investors to make emotional knee-jerk reactions adversely affecting long-term returns. An investor, fearful a correction may be the next big bear market, may sell stocks into the decline, and then get whipsawed when stocks suddenly and convincingly recover. Volatility is, by definition, a rapid and unpredictable change. It is not an enjoyable experience. But, there’s something to be said about staying the course despite the discomfort.

If we step back and examine six of the previous VIX (volatility index) spikes above 40, indicating extremely high-fear levels, there is a trend. Within three years of volatility-induced declines, the market not only recovered its losses, but also produced additional positive returns in each case. Five years out, those gains remained positive, too.

A takeaway then is, while volatility is difficult to endure, it can present opportunities for long-term investors. When the broad sentiment is fear and others are selling, it may be time to be contrarian: consider the opportunity to, not only stay invested, but to buy while prices are depressed.

 

 

The opinions expressed in this commentary should not be considered as fact.  This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results. Diversification does not protect against loss of principal.

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