01 Apr Quarterly Letter to Clients – March 2018
If market volatility could speak, it would have been heard exclaiming, “The rumors of my death have been greatly exaggerated,” during the first quarter of 2018.
Alive, indeed, it was.
Entering the new year, the market had not seen a down quarter in almost two and a half years, rising for nine straight quarters since October, 2015. Monthly, it was riding a streak of fifteen straight positive monthly returns dating back to just before the presidential election of November, 2016. An incredible consecutive run.
Two significant bouts of increased volatility, one in early February, and again in late March, led to market declines approaching 10% from the market peak, which spooked many investors already in the nervous camp. However, this also assured seasoned market participants that in fact markets can be irrationally unpredictable in the short term, and corrections are a healthy element of market conditions even in the best of times.
This “correction” was really an inter-quarter event that followed an unusually rapid rise in January where the S&P 500® Index briefly printed year-to-date gains of +7.5%. In our view, the extrapolation of only good economic news, a new vocally business-friendly administration and tax-cut euphoria had created bullish sentiment levels not seen since 2010. The jobs report in early February showed continued improvement in the unemployment rate, coupled with a 2.9% year-over-year increase in average hourly wages. This higher-than-expected uptick in reported wage levels was the perfect spark for a swift, but modest, reset of valuation and sentiment.
Interestingly and commonly, this adjustment had its roots in economic strength, not weakness. Strength in the economy has raised concerns by some over future inflation and interest rate levels. It is clear to us the Federal Reserve is in a mode of tightening monetary policy, reflective of a strong and expanding economy.
Once the dust settled on the quarter, it finished with a modest decline of -0.76 % in the S&P 500® Index and a decline in the Russell 2000® Index of only -0.08%.
We remain comfortable with the macroeconomic environment and believe that the U.S. and global expansion theme is intact and valuations remain reasonable. Volatility will likely remain elevated in the coming weeks.
We will continue to assess your portfolio, focusing on the merits of the individual companies held. Our emphasis remains on finding companies that are reasonably priced with solid financials and growing profits.
Please let us know if there have been any changes in your overall risk tolerance or desired cash levels.
Enjoy your spring!
James M. Connors
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