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Quarterly Market Wrap: Volatility Returns In 2018

By Remy Blaire

NEW YEAR, NEW TRENDS

The days of kicking back and watching the equity market hit new record highs came to an abrupt halt in 2018. Instead of cheering yet another record level for the Dow Jones Industrial Average, the S&P 500 or the Nasdaq Composite Index a new trend emerged: wild swings that would propel equity averages higher one day and then pull them lower the next. It is no longer abnormal to see several sessions of losses followed by a day or two of recovery and a convoluted mix of ups and downs.

Volatility finally returned from its extended vacation this year and announced its presence with unabashed intensity. The low volatility stock market rally chose to exit stage left as we embarked on our year-end holiday celebrations and cheered the annual growth in our portfolios. Little did we know how soon the calm would be coming to a screeching halt.

WHIPSAW MARKET: HANG ON TIGHT FOR ROLLER COASTER RIDE

The first quarter started out on a positive note with January’s stock market performance bringing yet another record high and further gains for the equity indexes. The popular narrative included caution over the heightened euphoria and grumblings over the impossibility of an extended bull market run. At the same time many market players opined that strong equity market gains at the beginning of the year usually equate to gains for the rest of the year.

Fiscal stimulus measures and optimism over U.S. tax cuts helped lift global bourses and bond yields in the first month of the year. While global growth continued, the potential for mild risks to the business cycle began to garner attention. Expectations of monetary policy changes by the world’s central banks hang amid the backdrop of trade tensions and uncertainty over regulation and policy over technology companies.

The first week of February kicked off with unexpected velocity as bond rates spiked and equity markets nosedived. The global growth story and corporate profits were intact but inflation fears became prominent and volatility instruments took a hit. On Feb. 5 the Dow Industrials tumbled 1,175 points after sliding as much as 1,600 points marking the largest intraday decline on record.

Ahead of the Easter holiday weekend U.S. equity averages settled in negative territory.

For Q1 2018 the Dow Jones Industrial Average lost 2.3% while the S&P 500 declined 1.2% and the Nasdaq Composite extended its seventh straight quarter of gains adding 2.3%. The Dow and S&P 500 failed to notch ten consecutive quarters of gains while the Nasdaq managed to advance for seven straight quarters.

Now that the DJIA snapped its longest winning streak since 1997 what does this mean going forward? More reasonable stock market valuations can be expected but for now it would make sense to pare back on expectations for long-term returns.

EARNINGS MOMENTUM RELIEF SHORT-LIVED

The beginning of earnings season brought focus back to factors affecting corporate fundamentals. Performance for most corporations beat estimates as widely expected but it is telling that profit forecasts for the upcoming quarters have been eased.

According to the latest data from FactSet, the S&P 500 forward 12-month PE ratio stands at 16.6 as of April 20, 2018. The level is above the 10-year average of 16.1. At the same time the debt to total equity ratio is at its highest level since 1999. So keep an eye on how credit conditions affect buybacks.

S&P 500 Forward 12M PE Ratio. Source: FactSet, Date: April 20, 2018.

The 10-year Treasury note yield topped the 3% level on April 24, 2018. The psychological level had been eyed with plenty of frenzied anticipation. This is the first time since January 2014 that the yield cleared 3%. As the yield rose and U.S. equity averages declined there was plenty of dissent about the Fed tightening cycle, economic growth and inflation expectations. It is important to keep in mind that global bonds will also feel the effects of central banks removing stimulus measures.

GOLD: WATCH THE VOLUME

Gold futures managed to post a gain in Q1 2018 to mark its third consecutive quarterly advance. To put the uptick in perspective it should be noted that the latest quarterly gain was the smallest recorded since 2011. Gold managed a gain of just 1.03% while other precious metals failed to post a gain. Silver lost 5.1% while platinum pulled back by nearly 1.2% and palladium slid a staggering 11%.

Prices hit a two-year high in the second week of Q2 pushing gold’s advance over the 3%  mark for the year.

Gold prices are utilized as a gauge of investor risk appetite under normal trading conditions. As a new quarter gets under way the equity markets continue to see plenty of swings to the upside and downside. Traditionally gold is seen as a hedge against inflation.

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MARKET SUMMARY

INDICES

Name Last Change
DOW 25669.30 0.43%
S&P 500 2753.17 0.75%
NASDAQ 7816.33 0.13%
TSX 16323.71 0.60%
TSX-V 678.01 0.00%

Resource Commodities

Name Last Change
Gold 1184.72 0.81%
Silver 14.81 1.28%
Copper 2.62 0.000
Platinum 790.14 0.000
Oil 65.91 0.68%
Natural Gas 2.95 1.29%
Uranium 25.80 1.71%
Zinc 1.05 0.00%

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