After the best January stock performance since 1987, turbulence returned to the market
Over the past couple of months, rising trade tensions and inflation concerns have unsettled investors
Ultimately, the S&P 500 Index suffered its first quarterly decline since the third quarter of 2015
Data Source: FactSet
Markets closed out the first quarter of the year on a sour note, as trade tensions between the U.S. and China escalated. Stocks in the Telecom, Consumer Staples, and Energy sectors saw the largest declines, while Technology and Consumer Discretionary stocks finished higher. Trade tensions sapped investor enthusiasm for stocks and raised more questions about where the markets may be headed next.
At first blush, it would be easy to dismiss such a question, particularly after the extreme optimism running through markets as recently as January. U.S. manufacturing activity is expanding, confidence is high, and earnings are growing. Lower U.S. taxes and a global economy experiencing harmonized growth point to an environment that would normally be fertile ground for stock prices to march higher. Very simply, sustained downdrafts in equity prices are almost always associated with recessions.
Despite the Federal Reserve raising interest rates for the sixth time in this tightening cycle last month, financial conditions are still relatively favorable for businesses and investors on a historical basis. Consumer confidence, small business confidence, and CEO business confidence currently sit at multi-year highs. Leading up to every recession since the 1980s confidence levels had steadily been on the decline, not rising as they are now.
Stock prices and valuations are driven, in the longer term, by fundamentals. Today, those fundamentals are bright, in our opinion. S&P 500 company earnings per share (EPS) are expected to grow roughly 17% in the first quarter and by nearly 19% for the full year, according to the financial data firm FactSet.
Also, an increasing number of companies have announced share buybacks this year. Stock buybacks could reach a record in 2018, driven by strong balance sheets, the repatriation of overseas cash, and higher profits. By buying back shares and removing them from the market, companies could help stabilize stock prices this year in tandem with rising corporate earnings and profits.
In our view, a potential trade war between the U.S. and China is the primary factor driving market anxiety at the moment. However, both sides are still engaged in dialogue, which is a positive in our view. We are cautiously optimistic that an all-out trade war is not as likely at this point as the headlines may suggest.
Risks are certainly growing for investors. Valuation levels are slightly more attractive due to the market’s modest decline so far this year, but there’s little room for error when it comes to corporate earnings or economic data. We believe protectionist trade activity, tightening monetary policy from the Federal Reserve, elevated earnings expectations, and later-cycle economic conditions, all point to a bumpier road ahead for stock prices.
Nevertheless, current corporate and economic conditions still favor a bias toward equities today. If earnings and the economy can meet or exceed expectations, we believe stock prices could finish the year higher than where they stand today. If earnings or the economy fall short of expectations, however, then stocks could languish.
For investors, this means properly aligning portfolios with desired risk levels and closely following the principles of diversification. Corporate and economic conditions are on solid footing today, and we do not believe a recession is likely over the near-term. But considering the recent upswing in market volatility, it doesn’t hurt to exercise some caution with your portfolio allocations.
As of April 11, 2018
Data source: Morningstar Direct
An index is a statistical composite that is not managed. It is not possible to invest directly in an index.
Standard & Poor’s (S&P) 500 Index
The S&P 500 is a basket of 500 stocks that are considered to be widely held. The S&P 500 index is weighted by market value (shares outstanding times share price), and its performance is thought to be representative of the stock market as a whole. The S&P 500 index was created in 1957 although it has been extrapolated backwards to several decades earlier for performance comparison purposes. This index provides a broad snapshot of the overall U.S. equity market. Over 70% of all U.S. equity value is tracked by the S&P 500. Inclusion in the index is determined by Standard & Poor’s and is based upon their market size, liquidity, and sector.
Dow Jones Industrial Average
The Dow Jones Industrial Average (The Dow), is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities.
Russell 2000 Index
The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set. The Russell 2000 includes the smallest 2000 securities in the Russell 3000.
MSCI EAFE Index
The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following 21 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. As of June 2, 2014.
MSCI Europe Ex UK
The MSCI Europe ex UK Index captures large and mid cap representation across 14 Developed Markets (DM) countries in Europe. With 337 constituents, the index covers approximately 85% of the free float-adjusted market capitalization across European Developed Markets excluding the UK.
MSCI United Kingdom
The MSCI United Kingdom Index is designed to measure the performance of the large and mid cap segments of the UK market. With 109 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the UK.
MSCI Emerging Markets Index
The MSCI Emerging Markets Index is a free float‐adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 23 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. As of June 2, 2014.
Bloomberg Barclays US Aggregate Bond Index (Abbreviated as Bloomberg US Agg in table)
The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency).
Bloomberg Commodity Index
Formerly known as the Dow Jones UBS Commodity Index. The Bloomberg Commodity Index is calculated on an excess return basis and composed of futures contracts on 22 physical commodities. It reflects the return of underlying commodity futures price movements.
Dow Jones U.S. Select REIT Index
The Dow Jones U.S. Select REIT Index intends to measure the performance of publicly traded REITs and REIT-like securities. The index is a subset of the Dow Jones U.S. Select Real Estate Securities Index (RESI), which represents equity real estate investment trusts (REITs) and real estate operating companies (REOCs) traded in the U.S. The indices are designed to serve as proxies for direct real estate investment, in part by excluding companies whose performance may be driven by factors other than the value of real estate.
The views expressed in this publication reflect the personal views of the Ameriprise Financial Services analyst authoring the publication. The views expresses are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
Information provided by third parties is deemed to be reliable but may be derived using methodologies or techniques that are proprietary or specific to the third-party source.
Except for the historical information contained herein, certain matters in this report are forward-looking statements or projections that are dependent upon certain risks and uncertainties, including but not limited to, such factors and considerations as general market volatility, global economic and geopolitical impacts, fiscal and monetary policy, liquidity, the level of interest rates, and historical sector performance relationships as they relate to the business and economic cycle.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value. Neither Ameriprise Financial, nor any of its advisors or representatives, provides tax advice.
Past performance is no guarantee of future performance. Diversification does not assure a profit or protect against loss.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.