Quarterly Market Update

The three week “melt-up” in January continued the 2017 rally, but soon came to an end as the markets quickly pulled back, falling 10% in two weeks. After a relatively calm 2017 with volatility near all-time lows, heightened volatility is to be expected for 2018. We believe the pullback is healthy and needed for the market to continue higher. Although we think the recent volatility has been short-term focused, we continue to monitor the daily moves in light of the bigger economic picture.

Recent developments involving the Trump administration, such as the resignation of Gary Cohn and the announcement of tariffs has negatively impacted the equity market, but these negative reactions have primarily been followed with fairly quick rebounds. As we have learned over the past year, the President seems to soften his rhetoric during negotiations. We believe this is part of his overall strategy to instigate change. The end result of the tariffs is uncertain. We continue to monitor their impact on the consumer and the economy, but we believe the Trump administration will successfully negotiate to avoid a full-blown trade war.

Uncertainty with the new Federal Reserve Chair has also contributed to market volatility. Last week the Fed raised interest rates and Chair Powell took a more aggressive approach than many expected. We continue to anticipate at least two more interest rate hikes this year. Although this has raised inflation worries, we believe intense competition drives down the threat of runaway inflation, allowing the bull market to continue as long as rates rise modestly and predictably.

We believe the market will continue to climb the “wall of worry” as solid economic growth and earnings overcome new developments of political, economic, and global risks. The U.S. economy looks healthy, earnings remain strong, unemployment remains low and wage inflation is gradually increasing. In addition, we believe the tax reform and repatriation of foreign held dollars will expand economic growth. 

Therefore, we anticipate the bull market to continue, albeit with increased volatility.

As always, please call with any questions or concerns regarding your investments.