Our team at New England Investment and Retirement Group, Inc. closely monitors the markets and the global economy. We offer our Quarterly Considerations as summaries of market and economic performance so that we can educate our clients and help them make informed decisions about their financial futures.
First Quarter Overview
Investors with long-term financial goals should take the first quarter performance of the global financial markets in stride. Global financial markets posted mixed results during the quarter amid a spike in volatility on concerns surrounding higher interest rates and rising inflation expectations. And the Trump Administration’s tariff announcements on goods including steel and aluminum led to heightened geopolitical tensions with several U.S. trading partners, sparking concerns of a trade war.
U.S. equity markets sold off sharply in late January and early February, resulting in the first correction since early 2016 but managed to move mostly higher for the remainder of the quarter in volatile and choppy trade. Despite the volatile environment, the S&P 500, the Dow Jones Industrial Average and the technology-heavy Nasdaq Composite managed to hover near their all-time highs.
Below are just a few of the first quarter events driving performance around the world.
The U.S. Looks Poised for Continued Growth
Here in the U.S., GDP increased at a better-than-expected annual quarter-over-quarter pace of 2.9%, reflecting robust consumer spending that was partially offset by a surge in imports, according to the Bureau of Economic Analysis. Inflation remained contained and the labor market exhibited continued strength with unemployment holding steady at 4.1% during the quarter. Meanwhile, the housing market remained resilient despite federal tax reform as record-low housing supplies continue to drive up prices. Corporate earnings continued to generally impress as companies begin to adjust for the impact of the tax overhaul. Many of these data points set the stage for continued growth, however investors should keep an eye on Fed tightening, trade tariffs and persistent uncertainty coming out of Washington in the weeks and months ahead.
Europe, Japan Economies Improving
Looking overseas, developed international equity markets produced mixed results on worries that a strengthening U.S. economy may lay the groundwork for a more aggressive Fed. Eurozone GDP grew by 0.6% on an annual quarter-over-quarter basis, according to Eurostat. Spain expanded at the fastest rate among major European economies, while France and Germany grew at a respectable pace, performing in-line with the overall Eurozone growth rate. Meanwhile, the European Central Bank held rates steady despite improving European economies. In the Pacific region, Japan’s GDP rose 0.4% on an annual quarter-over-quarter basis, as gains in capital expenditure were stronger than expected. This marked eight straight quarters of expansion and confirmed the longest run of growth in 28 years. And the Bank of Japan left its monetary policy unchanged, even as economic data showed improvement.
Emerging Markets Among Best Performing, But Beware Volatility
In the emerging markets, returns were propelled marginally higher by strong performances coming out of Brazil, which appears to be emerging from a recession and Russia, which was supported by higher oil prices and signs that economic conditions are improving. Emerging markets equities continues to be among the best performing asset classes in 2018, this after an exceptional showing in 2017, but expect that volatility will likely persist, particularly over heightened trade war fears and escalating geopolitical events.
A Look at First Quarter Global Market Returns
Fixed income results (show on the left of the chart) were mixed as yields were volatile. The yield curve continued to flatten as shorter-term yields rose more than longer-term yields, and the 10-year Treasury ended the quarter at 2.74%, 33 basis points higher than the fourth quarter. Core U.S. bonds, represented on the chart by the Barclays Aggregate, declined 1.5%, with mortgages providing the highest returns and corporates lagging the index. High Yield performed marginally better, falling 0.9%, this, despite weakness in equity markets and higher volatility. Meanwhile, currency-hedged foreign bonds ended the quarter 0.9% higher. Unhedged foreign bonds benefited from weakness in the U.S. dollar and rose 3.6%. Similarly, local currency EMD rose 4.4%, adding to its impressive showing in 2017. Munis edged lower with shorter-dated issuers outperforming longer-dated issuers.
Within equities, most major asset classes posted negative results, with emerging markets stocks being the exception. In the emerging markets, Latin America dominated, led by strong gains out of Brazil. In emerging Asia, China posted results that outpaced the index; however, this was offset by weakness among Indian equities. Among developed international stocks, those in the Pacific region outpaced those in Europe. In the U.S., there was no clear leadership among capitalization with large caps and small caps performing similarly. However growth remained in favor, clearly outperforming value.
Real estate, both in the U.S. and overseas, declined during the quarter. Commodities ended mostly unchanged as strength among several agriculture components was offset by weakness among several industrial metals components, including aluminum. MLPs, meanwhile came under heavy selling pressure amid FERC’s tax policy revision.
Proper Diversification Will Help Weather Market Surprises
As mid-year approaches, the markets in the U.S. and globally are encouraging, but investors should recognize that event risk and the associated volatility are likely to remain prominent in the markets during 2018 as a clearer vision of U.S. trade policy unfolds and other geopolitical events make headlines. It’s always difficult to predict what the market will perform or when the next surprise or twist may occur, which is why it is more important than ever to remain properly diversified. Investors should be patient and adhere to a well-constructed and thoughtfully diversified investment portfolio anchored to their goals and time horizon.
If you have any questions about the information in this post or about what to do with your investment portfolio, please contact any of our advisers at NEIRG. We will work with you by providing unbiased, objective and clear guidance, and help you determine the best path to take to achieve financial independence, especially in times of market uncertainty.
Disclaimer: This report is intended for the exclusive use of clients or prospective clients of New England Investment & Retirement Group, Inc. Content is privileged and confidential. Any dissemination or distribution is strictly prohibited. Information has been obtained from a variety of sources believed to be reliable though not independently verified. Any forecasts represent median expectations and actual returns, volatilities and correlations will differ from forecasts. Past performance does not indicate future performance. All information contained herein is believed to be correct but accuracy cannot be guaranteed. Past returns are not indicative of future results. Comments and general market related projections are based on information available at the time of writing, are for informational purposes only, are subject to change without notice, and may not be relied upon for individual investing purposes. NEIRG and its employees do not provide legal advice and do not provide tax advice outside of the advice given in relation to financial planning and asset management services. NEIRG maintains the necessary notice filings, registrations and licenses with all appropriate jurisdictions.
When referencing asset class returns or statistics, the following indices are used to represent those asset classes. Each index is unmanaged and investors can not actually invest directly into an index: Cash – Citigroup 90 Day T-Bill; TIPS – Bloomberg Barclays US Treasury TIPS; Municipals – Bloomberg Barclays Muni Bond 5-Year; High Yield Municipals – Bloomberg Barclays High Yield Muni Bond; Aggregate Bond – Bloomberg Barclays US Aggregate Bond Index; High Yield – Bloomberg Barclays US Corporate High Yield; Foreign Bond – Bloomberg Barclays Global Aggregate Ex USD; Emerging Debt – JPMorgan GBI-EM Global Diversified Unhedged Index; Large Value – Russell 1000 Value; Large Blend – S&P 500; Large Growth – Russell 1000 Growth; Small Value – Russell 2000 Value; Small Blend – Russell 2000; Small Growth – Russell 2000 Growth; International – MSCI EAFE; Emerging Markets – MSCI EM; Domestic REITs – FTSE NAREIT Equity REITs; Global REITS – S&P Developed World Property; Commodities – Bloomberg Commodity Index; MLP – Alerian MLP; Hedge Funds – HFRI Fund of Funds Composite Index; Balanced^ – 3% Bloomberg Barclays US Treasury TIPS, 31% Bloomberg Barclays US Aggregate Bond Index, 1.5% Bloomberg Barclays Global Aggregate Ex USD, 1.5% Bloomberg Barclays Global Aggregate Ex SD (Hedged), 4% Bloomberg Barclays US Corporate High Yield, 2% JPMorgan GBI-EM Global Diversified Unhedged Index, 17% S&P 500, 6% Russell 2000, 15% MSCI EAFE, 7% MSCI EM, 3% FTSE NAREIT Equity REITs, 2% Bloomberg Commodity Index, 5% Alerian MLP, 2% Citigroup 3 Month T-Bill.