EQM Capital LLC – 1Q 2018 Market Review – The Return of Volatility

Posted on Apr 3, 2018

In the first quarter of 2018, investors were reminded that stocks markets don’t go up forever, and that they can be something of a roller coaster ride. The euphoria that carried the markets to record high levels last year, came to a screeching halt in February, experienced a rebound, only to sell off once again.  Volatility, which was virtually non-existent last year, has finally returned with a vengeance.  The VIX, the measure of 30-day implied volatility for the S&P 500 Index which is considered a market “fear gauge”, spiked 81% for the quarter from 11 to almost 20.

The Dow experienced its worst quarter since 2015, posting a 2% decline and the S&P 500 Index without dividends ended its nine-quarter winning streak with a drop of 1.2%. Among the major benchmark indices, only the tech-heavy NASDAQ managed to stay above water with a gain of 2.6%.  That is not to say that all tech stocks remained unscathed.  Facebook and other social media companies were hit hard on data privacy concerns.

So what factors caused the spike in volatility and markets to decline in the first quarter?

  • Rising interest rates
  • Inflation concerns
  • The escalating trade tariff war

Global markets were not immune from the sell-off or rising volatility. Developed international markets, as represented by the MSCI EAFE Index, also declined 2.2%. But Emerging Markets continue to remain a bright spot, up more than 22% over the last year and gaining 1.1% for the quarter.  Bond indices were under pressure due to rising interest rate concerns, with the Bloomberg Barclay’s Aggregate losing 1.5% as the Fed has telegraphed three rate hikes this year.

Despite the recent market turmoil, underlying market fundamentals remain bright. Corporate profits and economic growth are expected to continue accelerate.  GDP is growing, people have jobs, higher wages, and they are spending.  The market was overdue for a correction, but most experts believe the long-term market trend remains positive.

Sporadic market declines are actually the norm and not the exception, and should be expected as a normal part of the investment cycle. The table below prepared by Capital Group depicts the history of market declines for the Dow.

Investors who do not panic in times of market unrest, have historically been rewarded for their patience. Now that market volatility has returned to “normal” levels, we are likely to see bigger swings in the market.  As such, it is an important to stay focused on the long-term and not try to time the market.


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