First Quarter 2018 Review & Outlook

“Everyone says stock market corrections are healthy…until they are in one.” – Wall Street Adage


Normal financial market volatility seemed to have moved to another planet in 2017. However, during the first quarter of 2018, stock market volatility returned with a vengeance and will likely persist moving forward this year. The first quarter of 2018 recorded 23 days of greater than 1% movements in the S&P 500 Index, which was almost triple the number of such days for all of 2017. Since 1958 there were nine other years when the first three months of the year had 20 to 25 days of at least a 1% move. In each of those years, the next three quarters all experienced an above-average number of days with moves of at least 1%, with an average of 86 days for the year.

If you were not paying attention during the first quarter to daily changes in the stock market, financial media announcements or tweets, you would be amazed how little your overall portfolio value changed. In January, we experienced a strong move up in stock prices, but in February and March the Stock Market managed to completely erase those gains. In fact, from the peak of the S&P 500 on January 26 we have experienced the first 10% correction since early 2016.

Overall, the Standard & Poor’s 500 Index and the Dow Jones Industrial Average declined slightly during the quarter for the first time in 10 quarters. The strong stock market advance of January gave way to concerns that a tightening labor market, accompanied by increasing wages, could cause the Federal Reserve to accelerate the pace of interest rate increases. In addition to the concern over tighter monetary conditions, fears of trade tariffs and reduced enthusiasm for large technology stocks were enough to break the stock market’s quarterly winning streak.

The current overall bull market did manage to celebrate its ninth anniversary towards the end of the quarter. However, there is still a great deal of skepticism keeping cash on the sidelines, even at this stage of the historically long stock market advance that began March 9, 2009. Market sentiment seems to change daily, while the underlying fundamentals of the real economy and corporate earnings outlook remain healthy. These conditions are usually a good sign that the bull market in stocks can continue.


The Federal Reserve, under the new leadership of Chairman Jerome Powell, is expected to slowly raise interest rates to stay ahead of inflationary pressure resulting from strong economic growth. The latest inflation readings released by the Labor Department reported that the Consumer Price Index rose 2.2% over the past 12 months ending February, which was slightly below the 2.3% forecasted by economists. Core inflation, which excludes the impact of food and energy prices, rose only 1.8% for the third consecutive month, which was also below economist’s expectations.

Chairman Powell’s reputation is that of a “Dove” on interest rates, like his predecessor, Janet Yellen. Therefore, it seems unlikely to us that the Federal Reserve will move rates higher in an abrupt manner. History has recorded numerous instances where sharp interest rate increases were blamed for prematurely stopping economic expansions, before economic conditions fully warranted a change in policy.

Forecasters predict the Federal Reserve will raise the short-term rate at least twice, if not three times, through the remainder of 2018. Many in the investment community expected the 10-year Treasury yield to be higher at this point given the strong economic outlook and expected short-term rate increases. However, the 10-year yield reached a four-year peak at 2.94% on February 21, subsequently retreating to finish March at 2.74%. At the start of the year, enthusiasm about economic growth was as high as we can remember, and the 10-year yield trajectory reflected that enthusiasm. The retreat in yields seems to coincide with more tempered optimism for the future.

Many forecasters are projecting the S&P 500 to report combined company earnings for 2018 of about $160 per share. At the current market level, this would imply a price to earnings multiple of about 17 times earnings, which seems reasonable considering earnings for the index are likely to grow by double digits in 2018. S&P 500 earnings for 2019 are projected to be $170 per share. Many leading indicators for the overall economy continue to exhibit positive signs, such as the job market and consumer spending. These leading indicators will typically begin to show weakness for a year or more before a recession ensues.


Marietta Wealth Management, LLC