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ECONOMIC FLASH – Stock Market Volatility is Back

April 2018

US Economy: Data suggests continued growth.

The final reading for 4Q US GDP growth surprised on the upside — 2.9% vs. 2.7% expected. The Consumer Confidence Index (127.7) and growth in consumer spending for March (+4%) indicate an economy in late-stage expansion.

US Stocks: March selloff wipes away gains.

Tech (-2.8%) and telecom (-4.3%) sectors were among the biggest losers as investors sold to lock in gains and worried about the probability of trade wars. Notably, the 5 high-tech superstar stocks collectively known as “FAANG” lost 6.9%.

Foreign Stocks: Dollar weakness provides a boost.

Strength in foreign currencies vs. US dollar helped total return on non-US stocks. Mutual fund flows into emerging market equities resumed after net withdrawals in February.

Fixed Income: Treasury yields take a breath.

Recent equity volatility has slowed the upward pace of interest rates. After rising steadily through February, the yield on 10-year US Treasuries fell 0.2% to finish March close to 2.7%.

Non-Traditional: Hedge funds hold their ground.

Some defensively positioned hedge funds (short-selling and market-neutral strategies) generated positive returns for investors; however, hedge fund indices were down slightly for March.

THE TAKEAWAY

There are valid reasons for the drop in US equities so far this year — profit taking, concern about trade wars and potentially stricter regulation of US tech giants. Underlying these news headlines we see a stable US economy that should continue to provide opportunities for return, albeit with higher volatility.

In April, corporate earnings for Q1 2018 should start to show the benefit of 2017 tax cuts and support equity prices as interest rates continue to nudge upward along with inflation. Consequently, we continue to recommend that portfolios include attractively priced equity investments that tend to benefit from inflation, such as infrastructure. In fixed income, we continue to benefit from strategies less vulnerable to rising interest rates.
Glossary and Disclaimer for Economic Flash

Equities Total Return

MAR 3 MOS 1 YR
U.S. Large Cap (2.5%) (0.8%) 14.0%
U.S. Small Cap 1.3% (0.1%) 11.8%
U.S. Growth (2.4%) 1.5% 21.1%
U.S. Value (1.5%) (2.8%) 6.8%
Int’l Developed (1.8%) (1.5%) 14.8%
Emerging Markets (1.9%) 1.4% 24.9%

Fixed Income Total Return

MAR 3 MOS 1 YR
Taxable
U.S. Agg. Bond (0.6%) (1.5%) 1.2%
TIPS 1.1% (0.8%) 0.9%
U.S. High Yield (0.6%) (0.9%) 3.7.%
Int’l Developed 1.6% 4.6% 11.4%
Emerging Markets 1.5% 3.2% 9.3%
Tax-Exempt
Intermediate Munis (0.1%) (0.6%) 0.6%
Munis Broad Mkt 0.3% (1.1%) 2.8%

Non-Traditional Assets Total Return

MAR 3 MOS 1 YR
Commodities (0.6%) (0.4%) 3.7%
REITs 3.7% (6.7%) (1.1%)
Hedge Funds
Absolute Return (0.2%) 0.3% 3.0%
Overall HF Market (1.0%) (1.0%) (3.2%)
Managed Futures (0.3%) (2.9%) (0.6%)

Economic Indicators

MAR-18 DEC-17 MAR-17
Equity Volatility 20.0 11.0 12.4
Implied Inflation 2.1% 2.0% 2.0%
Gold Spot $/OZ $1325 $1303 $1249
Oil ($/BBL) $70 $67 $53
U.S. Dollar Index 86.2 88.7 94.4