Market Commentary: First Quarter April 16, 2018
The first quarter of 2018 is a tale of two periods—the first three weeks of January and the remaining 60 days. At the beginning of the year, the positive momentum from last year continued with stable, solid global stock market gains. At the end of January, the largest U.S. stocks represented by the Russell 1000 Index were up 5.5%, international stocks represented by the Europe, Australia, Far East Index (EAFE) were up 5.0%.
Suddenly, in February, fears of an economy that was doing too well started causing investors concern that the Federal Reserve was going to increase interest rates faster than previously expected. The Dow Jones Industrial Average dropped 1,000 points twice! Then it almost completely rebounded, only to lose 1,600 points in the last two trading days. Overall for the month, the Russell 1000 Index declined 3.6%; the EAFE declined 4.5%. Both were still positive year-to-date.
The markets in March reminded me of the Tri-Cities weather—sunny and warm followed by rain and wind. Although the fundamentals of U.S. stocks are still looking positive, the threat of interest rates, then a trade war ultimately spooked the markets into negative territory for the year. The Russell 1000 ended the quarter -0.7%, while the EAFE ended -1.4%.
As interest rates increase, or if interest rates are expected to increase, the price investors are willing to pay for bonds declines. The Federal Reserve increased the Federal Funds rate by .25% this quarter. The market expects there to be a couple more interest rate increases by the end of the year. If the economy continues to remain strong, the Federal Reserve may become concerned with inflationary pressures and raise rates to slow the economy down. When rates increase, borrowing costs become higher, squeezing corporate profits. Declining profits generally mean lower stock prices, and higher rates generally mean lower bond prices. The Barclays U.S. Government/Credit 1-5 Year Bond Index was down -0.5% for the quarter.
In case you were interested… Bitcoin lost over 48% for the quarter.
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