• Equities slightly negative for the quarter
• Bond yields higher for the quarter but trending down
• Fundamentals strong; monetary policy predictable
• World equity and fixed Income markets down in Q1
• For now, look for “noise” to dominate fundamentals

The year commenced with the broad domestic equity markets continuing their steady march upward amid little volatility. That scenario ended in late January with a jobs report that was interpreted as inflationary and markets subsequently corrected. The correction was magnified by trading in fairly esoteric volatility products. Equity markets began to recover; however, they have run into the headwinds generated by the Trump administration’s talk on tariffs and the potential for trade wars. Throw in some misbehavior by high profile companies like Facebook and investment advisors are uncertain and nervous.

The above scenario also has played out in the domestic fixed income markets as the yield on the 10-year Treasury bond which closed out 2017 at the 2.40% level rose to nearly 3% subsequent to the January jobs report but has fallen back down to the 2.75% level amid investor uncertainty, and more importantly, subsequent economic news which calls into question (once again) the return of inflation and a pick up in economic growth domestically.

Meanwhile corporate earnings continue to be stellar and expectations continue to be strong. Earnings growth for 2017 came in at low double digits after being stalled for the previous three years. Q1 2018 earnings are projected to be up north of 17% and the year is anticipated to report growth in earnings of between 15% and 20%. Tax reform is anticipated to contribute 5%-6% of the growth in 2018 earnings for the S&P 500.

Monetary policy domestically has been well telegraphed and predictable. The Fed Funds rate was raise by another .25% in March and the market consensus continues to be for two additional rate hikes this year. While longer term Treasury rates initially rose in the beginning of the year they have pulled back of late and the yield curve has once again flattened.

As the second quarter commences we continue to believe fundamentals are in place for the domestic equity markets to continue their climb higher. With the market pullback and continuing upward revisions to corporate earnings the valuation on the S&P 500 is reasonable at 16 X earnings -especially given historically low interest rates. For now, it appears fundamentals will take a back seat to headlines, speculation, and negative investor sentiment.

Major market returns for the first quarter were as follows:

S&P 500 -2.11%

NASDAQ .66%

Dow Jones Industrial Average -3.52%

Barclay’s Aggregate Bond Index -1.67%

High Yield Bonds -.91%

3 Month Treasury Bill .37%

MSCI EAFE (International Equity) -5.09%

Emerging Markets .24%

Within the S&P 500, Technology and Consumer Discretionary stocks were the best performers posting quarterly returns of 3.20% and 2.76% respectively. The more defensive sectors continue to lag as evidenced by Consumer Staple stocks declining 7.77%; Telecommunication stocks declining 8.69%; Utility issues falling 4.20%.

Energy shares continue to struggle as the were down 6.58% for the quarter.

As has been the case for some time now growth-oriented stocks handily outperformed value-oriented shares across large, mid, and small capitalization asset classes.

Looking forward this year we believe the domestic capital markets will ultimately be driven by data around domestic economic growth (GDP), inflationary expectations, and interest rates. We are not necessarily in the camp that the rise in all three is imminent. We will monitor. Ultimately, we hope the “noise’ holding back the equity markets will subside as the fundamentals dictate the contrary. For now, we don’t see the pickup in volatility subsiding.