Week in Review


Week in Review: February 12, 2018




Volatility shook markets throughout the week as global investors anticipated the end of the era of easy money and peak liquidity. The S&P 500 hit a formal correction on Wednesday, down from the recent peak achieved on January 26th, but managed to claw back some gains on Friday ending the week down by -5.1%. Global markets experienced similar losses with the MSCI EAFE and MSCI Emerging Market indexes falling by -6.2% and -7.1% respectively.  


Inflation in Focus







As we covered in our Market Updates on February 6th and 8th, the surprise that kicked off the week was strong employment data—better job growth, fewer jobless claims, higher average hourly earnings—which are potential harbingers of inflation. This data, viewed in tandem with the Fed’s comments from the January meeting which suggested a path of three rate hikes in 2018 and potentially more next year, was enough to rattle investors. Historically, the adjustment to higher interest rates is a painful process. When money is cheap, liquidity is abundant and there are few alternatives to stocks. These conditions often lead to expensive valuations and strong stock market performance. We have been in just this period and are now headed toward higher rates as the economy picks up. 

The week also marked the beginning of Jerome Powell’s tenure as Chairman of the Federal Reserve. Powell was sworn in on February 5th and this transition may have also added to some of the volatility seen throughout the week. Historically markets like to test new Fed chairs, although the declines would likely need to be much higher in order for the Fed to consider changing course. Powell is scheduled to deliver his first monetary policy report to the House and Senate at the end of this month and investors hope his comments are in line with the prior Fed chair, Janet Yellen. 

However, the broader picture is that all of this volatility is occurring against a backdrop of strong economic growth, rising corporate earnings and rising sentiment. As of the end of the week, 68% of companies in the S&P 500 had reported earnings for the fourth quarter of 2017 with 74% exceeding earnings expectations and 79% exceeding revenue expectations. Even compared to the strength of earnings earlier in 2017, these numbers are impressive. Further, purchasing manager indexes and other leading economic indicators still signal that the global expansion is still accelerating.

Upside surprises in inflation, much stronger wage growth and more aggressive tightening by the Fed are some of the factors that we are paying particular attention to, but for the time being we believe that the recent decline is archetypal of a typical correction and not the beginning of a prolonged bear market. Globally monetary conditions are tightening and volatility is coming back to the markets after an uncharacteristically long period of calm. This paradigm shift will reveal a number of things—including where the next bargains lie. For now, we think investors should remain committed to balanced portfolios and be patient in rebalancing portfolios given the volatility we expect as the correction settles out.



Market Returns (USD)

1-Week

Quarter-to-Date

Year-to-Date

1-Year

Global Equities

MSCI All Country World

-5.7%

-2.3%

-2.3%

16.8%

S&P 500

-5.1%

-1.8%

-1.8%

15.8%

Dow Jones Industrial Average

-5.1%

-1.9%

-1.9%

22.8%

NASDAQ

-5.0%

-0.3%

-0.3%

21.6%

Russell 2000

-4.5%

-3.7%

-3.7%

8.6%

MSCI EAFE

-6.2%

-2.8%

-2.8%

17.9%

MSCI Emerging Markets

-7.1%

-1.3%

-1.3%

26.2%

Fixed Income

ICE BofAML Municipals 1-10 Year A-AAA 

0.1%

-0.5%

-0.5%

1.0%

Bloomberg Barclays Intermediate Government/Credit

0.1%

-1.0%

-1.0%

0.6%

Bloomberg Barclays High Yield Bond

-1.5%

-1.3%

-1.3%

4.1%

JPMorgan GBI Emerging Markets Global Diversified

-1.8%

2.1%

2.1%

13.8%

Market Levels

Friday

Week Ago

Year End

Year Ago

S&P 500

2,619.55

2,762.13

2,673.61

2,307.87

Dow Jones Industrial Average

24,190.90

25,520.96

24,719.22

20,172.40

10-Year U.S. Treasury Yield (Constant Maturity)

2.83%

2.84%

2.40%

2.40%

Gold ($/oz)

$1,316.65

$1,333.39

$1,302.80

$1,228.36

Crude Oil ($/barrel)

$59.20

$65.45

$60.44

$55.33

U.S. Dollar / Euro ($/)

1.23

1.25

1.20

1.07

U.S Dollar / British Pound ($/£)

1.38

1.41

1.35

1.25

Japanese Yen / U.S. Dollar (¥/$)

108.80

110.17

112.69

113.25