News & Insights
April 2018 – Volatility Returns, a Long Overdue Development
YorkBridge Investment Committee
Following the mad dash upward in January of both earnings increases and stock prices, the market has abruptly normalized with two brief but intense drops that brought valuations back to pre-tax reform levels. The so-called “January Barometer” effect – which indicates that the market direction for the rest of the year follows January’s performance – has been accurate 87% of the time since 1950; but will it be this time? Though the S&P 500 was up 5.62% in January alone, the index at the time of this publication is down -1.8% year-to-date.
While we continue to be less bullish than we were last year, economic and earnings data have been very strong and should remain so for some time, both here in the U.S. and in global economies. However, several things have changed, and those are issues of concern.
With major stimulus from tax reform to an economy already well advanced in the economic cycle, and a president bent on protectionist rhetoric and significant tariff action, we would not be surprised to see several more corrections like the ones we have seen already. Fears of wage inflation caused the first violent downdraft, then trade protection/tariff fears spooked investors who worry an escalating trade war could hurt much more than help. Both fears abated – for now – but the markets continue to react to headlines causing a shift to short-term worries resulting in volatility rearing its ugly head.
While we expect periodic jolts to the markets this year because of concern about when the good times will end, a typical correction does not usually warrant a change in strategic asset allocation when underlying fundamentals remain unchanged, with no talk of recession, as is the case right now. Unemployment is low, job creation is strong, consumer confidence continues to be high, and most economists expect growth to go well into next year: the markets have been much more volatile than the macro picture would suggest.
So what do we worry about? While the new Fed Chair has soothed fears by sticking to the Fed’s measured interest rate hike plan, and inflation remains subdued by all historical measures, the ballooning fiscal deficit and the less accommodative stance of central banks around the world could eventually lead to tightening credit conditions that dampen growth. Although that looks to be 2019’s business, we are watching the rate of change very closely to determine if a strategic allocation change to a more defensive posture is warranted.
For now, however, we continue with our current positioning, and believe that active managers will continue to outperform passive indices as they did last year. We at YorkBridge Wealth Partners welcome any and all of your questions and are happy to discuss your portfolios, finances, the markets, and anything else on your mind.
The Information contained in this document is based on data received from third parties which we believe to be reliable and accurate. YorkBridge Wealth Partners, LLC has not independently verified the information and does not otherwise give any warranty as to the truth, accuracy, or completeness of such third party data, and it should not be relied upon as such. Any opinions expressed herein are our current opinions only. YorkBridge Wealth Partners, LLC is an SEC Registered Investment Adviser under the Investment Advisers Act of 1940 (“Advisers Act”). Registration of an investment advisor does not imply any specific level of skill or training. The information contained in this document is to assist with general planning. Please consult with your own tax advisor and attorney for more specific information.