Monthly Brief February 2018 – Can Uptrend Continue?

Monthly Brief February 2018 – Can Uptrend Continue?


As equity markets have rebounded from the early February lows, investors continue to focus on interest rate expectations, particularly the US 10-year Treasury Note and Federal Reserve policy. There appears to be a growing acceptance that rising rates require caution, rather than fear. As with most interest rate cycles, initial upturns tend to be indicative of improving economic conditions, which are typically supportive for equities. Since the breaking point of higher interest rates is rarely known until it is reached, building caution amidst increasing swings within market trends is typical as investors contemplate what may be next. Going forward, analysis of the interest rate climate and its impact on the dollar will be judged in light of broad economic strength and healthy earnings growth. Add in the uncertainty of whether recent fiscal stimulus plans and the accompanying debt are a net positive or negative and it appears likely that, while the trend may still be upward, it will be accompanied by a continuation of recent increased equity market volatility.

Following the calm equity markets of 2017, 2018 has awakened investors’ concern regarding risk. The rapid gains accrued to start the year were quickly replaced by a sharp decline. Market action such as this leaves one wondering if the uptrend has ended. But, could it be that January’s advance was a greater outlier than the following move lower? Looking at the S&P 500 Index from January 2014 through February 2018, two distinct trends can be seen – a choppy, sideways market followed by an orderly uptrend. (Each period’s trend is represented by a red regression line, along with the statistical variance during the period.)

Viewed in the context of this long uptrend, the sharp gains in January look to be a greater deviation from the trend than the subsequent decline.

Whether this uptrend persists will be determined by a number of variables, but, don’t count it out based solely on the recent pick up in volatility. While the path may not remain as comfortable, for now, the trend appears to remain in place. But, to paraphrase a quote often attributed to economist John Maynard Keynes, “When the facts change, I change my mind”.

James Ferrin, CFA
Chief Investment Officer


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