The second quarter of 2018 has begun with a notably disappointing start.  US markets opened down and continued to fall throughout the day, with the S&P 500 closing off -2.23%.  This came on the heels of our first negative quarter for domestic equities since third quarter 2015. 

For the quarter, the S&P 500 lost 0.76%. While technology stocks managed to gain 3.20% over the same period, they lost 3.95% in March.

While 2018 got off to a nice start, sentiment seemingly changed in early February.  A return of volatility, largely absent from the markets last year, has sent prices swinging and investors looking for reasons.  An early assessment tended to liken the price changes to little more than a return to “normal” volatility.  With central banks shifting policy bias from accommodative, it has been argued equity markets are forced to stand on their own and should be expected to display wider variation in day-to-day changes.  While this argument has merit, it is falling a bit short with continued daily swings ongoing and increasing in magnitude.

The change in US Federal Reserve interest rate policy isn’t new for 2018, and changing policy in Europe has been on the horizon for some time.  More timely issues, it would seem, are likely driving the current market fluctuations.  Namely, pressure on a few technology stocks paired with escalating actions related to ongoing tariff disputes is likely driving reconsideration of the longer-term health of the market.

At first glance, privacy issues impacting a few social media companies should have little impact on the overall market.  But considering these are the very companies that have driven much of the market’s recent performance, their performance could very well dictate the near-term behavior of the market overall.  Compounding this, increased tariff related tensions have the possibility of impacting not just U.S. multi-national companies reliant on international trade, but, by extension, a seemingly wide swath of Main Street providers that generate the very products being targeted by retaliatory tariffs.

It is worth noting that these changes are not happening in isolation. As one would expect, the fixed income markets have responded with US 10-year Treasury rates falling from near 3% to 2.75% over the past month.  And while corporate earnings appear stable, spreads on corporate debt have widened a bit.

While all of this might be interesting, the more important question is what to do with portfolios as new market trends appear to be unfolding.  Core to any approach is a steady hand and a focus on underlying fundamentals.  As such, we continue to watch for any deterioration in the economy at large and, more specifically, changes in corporate earnings.  To date, neither area is raising any alarms, but the current bout of volatility, which we do not expect to abate, is a signal worth watching.  As these events unfold over the coming days and weeks, we will assess whether a new landscape warrants an adjustment to portfolios.