A Stark Contrast
Strong gains amid very low volatility were overarching themes in 2017. The market rose every month for the first time in history and went on its second longest run on record without a 5% correction. Compared to a typical year in which the S&P will experience a peak to trough decline of around 10%, the worst decline in 2017 was less than 3%.
Amid these minor swings, the market advanced 22% with the Dow Industrials making 71 record highs, eclipsing an old record of 69 in 1995. While environments of strong returns and low volatility are certainly welcomed and comfortable, they always prove temporary.
The first three months of 2018 could hardly have been much different than lastyear. After racing out of the gates to a 7% gain in the first three weeks of the year, theS&P 500 gave back all of its return and a bit more as the index finished modestly lower in the quarter (-0.8%) and experienced its first 10% drop since early 2016. Market volatility (as shown in the chartlocated in the full report below) returned towards the longer-term average as investor attention quickly moved from the benefits of tax cuts to worries oftrade wars, inflation, tech company issues, and Federal Reserve interest rate policy.
As these worries materialized, investor sentiment shifted from record levels of optimism to a mild pessimism that exists today. In our view, fundamentals across the world economy appear healthy. It is not uncommon for volatility to pick-up in the later stages of business cycle expansions.
We do believe the tide is shifting in the market, which will cause market leadership to look very different in the years ahead than what we have seen for much of the current expansion. In the end, investors should emphasize areas of opportunity and take the recent volatility in stride, provided assets are allocated according to long-term needs and are properly diversified.