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.
CHART OF INTEREST – CAN UPTREND CONTINUE?
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
Quantitative Advantage, LLC (QA) is an investment advisor registered with the Securities and Exchange Commission and is a limited liability company organized in the state of Minnesota. Registration of an investment advisor does not imply any specific level of skill or training. QA Wealth Management is a division of QA. This information has been prepared by QA, is provided for informational purposes only and does not constitute investment advice. It contains general information, is not suitable for everyone and is subject to change without notice. The views and opinions expressed in this report are solely those of QA and are current as of the date of writing. While the content is provided in good faith to provide a general commentary of current market factors and conditions, the views and opinions expressed are limited in scope and QA makes no representation or warranty as to the accuracy or completeness of the information provided. Past performance of the global investment markets is not a guarantee of future results.
The index performance results referenced in this report represent past performance and are not a guarantee of future performance. Investment returns and principal value will fluctuate and are subject to market volatility, so that a client’s investment, when sold, may be worth more or less than the original cost. Indices are unmanaged and investors cannot invest directly in an index. An index’s performance does not reflect the deduction of transaction costs, management fees, or other costs which would reduce returns.
The S&P 500 Index is a stock market index based on the market capitalizations of 500 large companies having common stock listed on the New York Stock Exchange or the NASDAQ Stock Market. For additional information regarding this index, please refer to the sponsor website at www.standardandpoors.com.
For more information about QA, its investment advisory and management services, fees, and the risks associated with the investments which QA’s investment strategies and model portfolios may make, please review QA’s Form ADV disclosure brochure, which is available at www.QAinvest.com, or upon request from QA’s compliance department by telephone at 866-767-8007, by writing to 10400 Yellow Circle Drive, Suite 303, Minnetonka, MN 55343, or by email to compliance@QAinvest.com. Please review the Form ADV disclosure brochure carefully before or at the time you enter into an agreement with QA.