The first quarter seemed to generate a lot of heat with very little light. Stocks ended the quarter fractionally down after a rip-roaring performance in 2017. Despite the modest total movement, the action was choppy, dramatically so for investors who had become accustomed to the preternatural calm that nestled stocks in 2017, providing nothing but positive returns in each calendar month last year, for the first time in over 50 years.
We began January with stocks streaking skyward by 8% on the heels of tax reform only to drop by 10% in early February, as hedge funds unwound exotic “volatility trades” and 10-year Treasury rates spiked and retreated. Add to this mix Mueller’s investigation, the President’s tweets, and perhaps most importantly a threatened trade war (as the Administration attempts to renegotiate trade terms with China, Mexico and Canada) and you can understand the market’s nervousness.
Last quarter we counseled a “steady as you go” approach in early 2018, even amid rich stock valuations. We predicated our stance on two things: continued global and U.S. economic growth and continued rising earnings for companies in the major indices. The former seems on sound footing and the latter seems set to accelerate. We still believe earnings in 2018 will give stock investors reason to cheer. The fiscal stimulus of the tax cuts adds some shine to the near-term earnings outlook.
For a list of concerns, we will start as we have for a few quarters, with the Fed. The determination with which they raised interest rates seems set to continue with at least two more hikes in 2018. At some point such action will take some starch out of the markets and possibly turn into a headwind. The best of this earnings cycle may present itself this year as the effects of the stronger economy and the tax cuts become fully discounted into earnings estimates.
Our current stance is remarkably similar as in December, but with a subtle shift of position. As 2017 closed, we counseled a steady course since good news on earnings and growth are yet to come. Now we might summarize by saying we are steady but watchful. Watchful primarily because of continuing tightening of monetary conditions by the Fed, and inflation concerns rising from the dead. Secondarily, there are concerns around trade tensions with China. This concern is tempered by our belief that the parties have an incentive to avoid a “trade war”, avoiding the worst outcomes. Steady but Watchful.
In closing, we appreciate your trust and partnership with Altavista, and we look forward to meeting to discuss your portfolio positioning and planning goals.
The Altavista Investment Team – Spring 2018