The first quarter of 2018 reintroduced investors to volatility that hasn't been seen since 2015. By definition, the Standard & Poor's 500 Index entered into correction territory on February 8th. A correction is created when prices decline more than 10% from a recent high. As the first quarter came to a close, the S&P 500 rallied briefly and ended the quarter nearly 8% below the all-time high of 2,872.87 set on January 26, 2018. The volatility spurred the largest single-day drops of the Dow Jones Industrial Average in history. The Dow fell 1,175 points on February 5th and 1,032 points on February 8th. The DJIA traded at an all-time high of 26,616 on January 26, 2018.
VOLATILITY: THE QUALITY OR STATE OF BEING VOLATILE,SUCH AS A TENDENCY TO CHANGE QUICKLY AND UNPREDICTABLY • PRICE VOLATILITY • THE VOLATILITY OF THE STOCK MARKET
Quarter 1 Indicators of Volatility
The sector leaders for the first quarter were Technology and Consumer Discretionary, each up almost 3%. The worst performing sectors were Real Estate and Consumer Staples.
One quarter does not make a trend. Over the last ten years nearly every major sector has experienced double or triple digit returns, lead by Consumer Discretionary stocks (represented below by the Consumer Discretionary SPDR ETF - XLY). This sector is home to Amazon, Home Depot and McDonalds. Cumulatively, XLY grew over 284% (14.43% per year). $10,000 invested in XLY would have nearly quadrupled to $38,486, whereas $10,000 in XLE - Energy Select Sector SPDR ETF - would have grown to $11,288, an average annual return of 1.22%.
Volatility & The Near Future
The United States Federal Reserve is expected to remain on track with interest normalization. After their meeting in March, the key interest rate was increased to 1.75%, the highest rate in 10 years. The Fed anticipates several more hikes in 2018. It is still uncertain if the pro-growth policies from the White House will continue to boost investor confidence. If the first quarter is a prediction of what is to come, it's possible the so called Trump-Bump could be coming to an end.
Despite the market volatility of the past two months and the correction that accompanied it; credit conditions and the technical backdrop has remained favorable and economic growth continues to be on the rise. However, it is important to note that there are genuine risks of market instability in the near future. The risks include: higher rates of inflation, continued federal tightening of money rates, geopolitical risks and new trade policies.
Markets don't like uncertainty. I believe the only certainty in life is is uncertainty. The market has been digesting: revolving cabinet seats, Russian spies, tariffs, trade wars, midnight spending bills, Facebook data harvesting, random Presidential tweets, rising interest rates, winter storms and Stormy Daniels. There are so many unanswered questions; what city will be the recipient of billions in new revenue, 50,000 new jobs and Amazon's 2nd headquarters? Who has access to Under Armour's massive data breach of the MyFitnessPal app? Who else knows my entire meal history and if I had a couple cheat meals?
Diversification - The Key To Volatility
No one can predict near term swings of the market. We all (professionals) can make some pretty good educated guesses, but at the end of the day, they are just that - guesses. Investors need to have a long term outlook at the market. Consider analyzing your returns through a telescope, rather than a microscope. Though the S&P 500 negative return YTD, the historical average since 1928 is nearly 10%. Is your investment portfolio in alignment with your financial goals? Now is a great time to review your goals and your overall risk tolerance. Avoid making short term decisions with long term investments and don't purchase long term investments for short term goals.
Over the long haul, owning equities (even with volatility) are the best way to outpace inflation and taxes. Just because the Consumer Discretionary sector was the best performer over the last ten years, it doesn't mean it will be a category king for the next years. Diversification is key!
*This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Returns illustrated assume all dividends and capital gains were reinvested. Returns do not include investment fees or taxes.
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Financial & Investment Advisory services provided by Money Script Wealth Management, PLLC "MSWM", a registered investment adviser offering advisory services in the states of Texas, California, Nevada, New York, North Carolina, and other states where exempted. MSWM does not provide specific tax or legal advice. Please consult your tax attorney and CPA.