Monthly Brief April 2018 – Trend Update: Decisive Time for Equity Markets

Monthly Brief April 2018 – Trend Update: Decisive Time for Equity Markets

 

CAPITAL MARKETS
The crosscurrents continued for investors during April 2018. On the positive side of the ledger were healthy earnings growth rates and further strength in the global economic data. Offsetting this were rising interest rates, inflation concerns and uncertainty (confusion?) regarding future global trade policy, i.e. “tariffs”. While most broad equity market indices were positive for the month, much of the gains accrued in the first half of April were given back by month end. Not coincidentally, this occurred in sync with another period of rising interest rates.

The interest rate tug of war appears to be tipping to the upside as the traditional forces which move rates higher are becoming more evident. Specifically, strong economic growth accompanied by tightening labor markets and upward pressure on inflation. This recipe can create uncertainty for investors, which is a vulnerable condition for the markets.

Going forward, of great interest to investors will be comments from corporate leaders about the potential impact of trade policy, along with any Federal Reserve comments regarding the sustainability of healthy economic growth and possible further interest rate hikes.

CHART OF INTEREST – TREND UPDATE: DECISIVE TIME FOR EQUITY MARKETS
Equity markets have enjoyed a relatively orderly advance since the early 2016 lows. And, while 2017’s lack of volatility has been well documented, 2018 has seen its return. A point of confusion is building as to the normalcy of this year’s market swings, and the media’s style of reporting on this topic has certainly served to further the sense of drama. This chart shows the general trend of the broad US and developed international equity markets since 2016 with the prevailing trend highlighted in green.

Against this backdrop, 2018’s market action has certainly had a different complexion. Current conditions look to represent a decisive moment for determining what might be the next leg. Since late January, markets have moved lower, but have remained within the long-term uptrend. We have seen this before, in late 2016, and the markets resolved the condition by resuming the advance. How will it play out this time? Likely, it will be determined by investors’ perception of the risks represented by policy decisions and interest rate expectations. Should they be judged as manageable hurdles for continued economic and corporate growth, the foundation for a continuation of the uptrend would be greatly enhanced.

James Ferrin, CFA
Chief Investment Officer

 

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