BKD’s Top Three
Over the first few months of the year, the stock market has experienced frequent volatility. Even though the market has been choppy, the economy remains on a strong foundation. Check out the takeaways from our 2018 Q1 update.
- The U.S. market, while volatile, does look to be supported by a strong economy. International economies should remain in positive territory for the remainder of the year.
- The likelihood of a U.S./China trade war seems low and should not spur a U.S. bear market.
- Investors should expect two to three more interest rate hikes in 2018.
For more details, read our expanded quarterly commentary below.
2018 Recap: Where the Markets Have Been
Estimates for first-quarter economic growth are 1.5 to 2 percent. This is below last year’s pace. While tax cuts are likely to add to growth this year, the effects haven’t had time to impact the economy. Also, first-quarter growth has lagged each of the last several years. Since 2009, the growth rate in the first quarter has averaged 1.7 percent below the average growth rate of the other three quarters. In our view, the U.S. economy is on firm footing. Growth forecasts for 2018 are in the range of 2.5 to 3 percent. Many foreign economies also are strengthening. Global economic prospects appear bright for the year ahead.
This quarter, stocks experienced their first 10 percent correction in two years. The first decline in February was prompted by stronger than expected wage growth, which sparked inflation fears. Interest rates rose on the news. Equities recovered most of the initial losses by mid-March, only to experience another correction to end the quarter. The second dip was prompted by concerns about the potential effect of trade tariffs proposed by the Trump administration.
While the causes vary, stocks tend to experience a 5 to 10 percent correction during most calendar years. The good news is the risk of a greater downturn is low when the economy and profits are both improving, as they are today.
Will the Talk of Tariffs Become a Trade War & Cause a Bear Market?
We don’t think so, given the size of proposed tariffs and the willingness of both the U.S. and Chinese governments to negotiate. To become a threat to the economy or markets, the current trade dispute would have to grow significantly larger. Both countries have publicly stated the intent to find a resolution. Therefore, the likelihood of a damaging trade war seems small.
Are Bonds a Good Investment When Interest Rates Are Rising?
The Federal Reserve raised interest rates for the sixth time in March. Rate hikes now total 1.5 percent since December 2015. Economists expect two to three more rate increases in 2018. Since bond prices fall as interest rates rise, total returns were slightly negative for the quarter.
Despite the recent weakness, it’s important to maintain an appropriate allocation to bonds for a couple of reasons. Most of the return from bonds comes from interest income, which increases as interest rates rise over time. In addition, bonds provide the first line of defense against stock market risk. So even though bonds posted small losses for the quarter, they provide the key portfolio benefits of income and diversification.
In the 2017 year-end review, we anticipated higher interest rates, higher inflation and the return of “normal” volatility in 2018. All of these things happened in the first quarter. Fortunately, diversified portfolios are built to withstand these changing conditions. Balanced portfolios were slightly below even for the period. By preserving capital through the rough times, investors are better positioned to participate in the opportunities that lie ahead. Improved fundamentals increase the chance that this investment year will finish stronger than it started.
BKD Wealth Advisors, LLC is an SEC registered investment adviser offering wealth management services for affluent families and investment consulting services for institutional clients and is a wholly owned subsidiary of BKD, LLP. The views are as of the date of this publication and are subject to change. Different types of investments involve varying risks, and it should not be assumed that future performance of any investment or investment strategy or any noninvestment-related content will equal historical performance level(s), be suitable for your individual situation or prove successful. A copy of BKD Wealth Advisors' current written disclosure statement is available upon request.