Apr 11 2018
April 11, 2018

First Quarter Volatility

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The first quarter was a gas, a real gas. Until it ran out of gas. Market traders burned their way through January as if there was no limit to their optimism. It was wonderful until it wasn’t. When the market got the jitters of a 14-year old on his first date you knew volatility was at the door.
As January wound down came news that the economy was on fire. At least employment numbers were well above expectations. Sounds good unless you’re concerned that the threat of a heated-up economy would force the FED to increase its rate hiking momentum. For a stock market that has fed on free money for almost a decade, the threat the FED might hike rates as many as 5 times in 2018 was a real appetite killer.
Then there’s the tech sector. With a 25% market cap in the S&P the tech sector has been the driver in market returns for some time. But then there was the question of whether-or-not tech stocks had become overvalued. As the quarter wore on tech stocks came under fire from the White House (Amazon) and from users (Facebook). As the market was beginning to regain composure, President Trump decided it was time to shake things up with threats of increased tariffs, sparking fears of a trade war. The worst fear was that the President was slapping around all-of our global trading partners. That fear was later defined as a demand that China begin trading fairly. Those negotiations are continuing.
The S&P finished the 1st quarter down 1.2% and the Dow down 2.5%. The Nasdaq was up 2.3% but gave that up as we moved into April. Yes, Virginia, there is volatility in the market. It had been absent for so long I’m using spell check to remember how to spell volatility. The fixed income (bond) market has been a painful place to have money. Over the 1st quarter the prime rate moved to 4.75% and the 10-year treasury threatened to top 3%. Bond prices go down as interest rates go up. The FED’s new chair has made remarks which have been translated by some as the rate hiking would heat up. The FED is very concerned about being behind the 8 ball should inflation suddenly burst on the scene.
There is some indication that wages and prices are ticking up, but only slowly. The impact of the higher interest rate environment is more evident. Consumer spending slowed during the first quarter as variable rates on home equity lines and credit cards began marching north. Fourth quarter 2017 GDP settled at 2.9%. 1st quarter GDP was measured at 2%. The reasons have changed, but volatility has become a tradition for the 1st quarter of the year. 2016 was especially grueling. And, once again, the counterweight to the equity market has been our position in gold. Treasuries have been absent from our portfolio for over 18 months.
As we moved into January the small cap position was sold ahead of the FED monthly meeting as a tactical move. As interest rates continue to move up it will become more difficult for smaller companies to access funds. Larger companies tend to have a cash supply from which to operate and will not feel the borrowing pinch as quickly.
Otherwise, our strategy is in place.