A lot is happening in the market, and you have questions.
We are here to provide you with pertinent and current information. Here is what the Horizon Investments Team (one of our key, third-party money managers) has to say regarding a rough first quarter in 2018:
Week of April 2, 2018
Strong Week, but Rough Quarter for Financial Markets
The final week of the first quarter saw generally positive economic data in the U.S. Jobless claims fell to their lowest level since 1973, while consumer confidence hovered near its recent 18-year high. Meanwhile, GDP growth for the fourth quarter was revised upward, to 2.9%. That said, the manufacturing sector saw some weakness, with the Chicago purchasing manufacturers index falling sharply in March.
Internationally, France and the U.K. posted better-than-expected GDP for the fourth quarter of 2017. Japan’s economic data was disappointing last week with industrial production and the Tankan Large Manufacturing Index coming in below expectations.
Domestic equity markets saw significant swings over the week, but ultimately finished up 2.1%. Internationally, Japan outperformed last week while Europe and developing Asia underperformed.
In the fixed-income markets, prices on longer-duration government bonds rose due in part to strong end-of-quarter demand from investors. Stock market volatility also boosted demand for relatively safe assets such as bonds. In addition, newly released inflation data that was in line with expectations helped support bonds.
GAIN: Active Asset Allocation
Stocks rallied into the end of the quarter, finishing strong after a volatile week (and month and quarter). Stocks ended up slightly negative for the three months through March, as did most asset classes. One exception: emerging markets, which was positive for the quarter.
We maintained the portfolios’ overweights to growth stocks and emerging markets. Growth stocks slumped last week, as stocks in the tech sector gave back some of their gains—the type of pullback that is fairly typical after a period of strong relative performance. Our emerging markets exposure was beneficial, as those stocks continued their strong performance into the end of the quarter. As we enter the second quarter, we are watching to see if markets re-establish their multi-year trends or if we are in a new regime.
Bond prices rose last week, with the 10-year Treasury bill yield backing off of its recent moves toward 3%. Corporate credits performed well as stocks rallied, and our exposure to corporates was constructive. However, our exposure to preferred stocks didn’t benefit as much from falling rates and underperformed the broader bond market.
PROTECT: Risk Assist
Equities rose sharply during the week, but encountered significant volatility along the way. For example, the S&P 500 on Tuesday fell 1.7% due largely to a sell-off in tech stock—but then rebounded 1.4% on Thursday. Volatility spiked, but finished the week slightly lower than it began.
The first quarter of 2018 also came to a close last week. For the quarter, the CBOE Volatility Index, or VIX, averaged about 17. That’s far higher than the average of 11 in 2017. That said, last year was an outlier that saw historically low levels of volatility. At 17, the VIX is now essentially at its historically “normal” level.
SPEND: Real Spend
The first quarter ended last week. Returns for global stocks and broad-based bonds were similar to each other; although, bonds slightly underperformed stocks. It’s important to note that stocks and bonds moving in the same direction (down, in this case) and by roughly the same magnitude at the same time is the exception, not the rule.
Inflation as measured by the Federal Reserve Board’s preferred gauge—the PCE—was in line with economists’ expectations. Core PCE, which strips out the volatile food and energy components, was up 1.6% year-over-year—close to the Fed’s long-run target for inflation of 2%. That suggests market expectations for future inflation are well managed and under control.
Overall, bond asset classes with relative short durations outperformed for the quarter. These included high-yield bonds and preferred stocks. Rising interest rates hurt longer duration securities the worst.
For the quarter, yield-chasing investors faced strong headwinds from market volatility and rising interest rates. Master limited partnerships were down more than 12% for the quarter, while REITs and global infrastructure fell nearly 6%.
Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This report does not attempt to examine all the facts and circumstances that may be relevant to any company, industry or security mentioned herein. We are not soliciting any action based on this document. It is for the general information of clients of Horizon Investments, LLC (“Horizon”). This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this document, clients should consider whether the security in question is suitable for their particular circumstances and, if necessary, seek professional advice. Investors may realize losses on any investments.
Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. This commentary is based on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions expressed herein are our opinions as of the date of this document. We do not intend to and will not endeavor to update the information discussed in this document. No part of this document may be (i) copied, photocopied, or duplicated in any form by any means or (ii) redistributed without Horizon’s prior written consent.
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