The roller coaster ride in the markets we predicted for 2017 finally happened during the 1st Quarter of 2018. So which is the more appropriate? The easy money of January or the tribulations of February and March?
What if the answer is neither?
As I have told just about anyone who will listen, there is nothing in the economic data, tea leaves, or crystal ball to suggest a noticeable slowdown in the economy is imminent. Therefore, it is hard to predict a sharp reduction in corporate profitability. Without that happening, a meaningful, protracted downturn in the stock market probably isn’t in the cards at this time. After all, these three things tend to go hand in hand in hand.
On the flipside, it is equally difficult to envision another 20% year in the S&P 500 like we had in 2017. Frankly, last year’s market strength and lack of volatility were surprising.
So, we are telling folks basically the same thing we told them last year: “At the end of December, you will feel like you have been through a prize fight, but you probably won’t be too upset with how your portfolio did. We just hope every quarter isn’t as crazy as the 1st was.”
To be sure, it started off so well. Didn’t January feel good? However, as we know now and suspected then, the markets were in La La Land at the start of the year. They were riding a wave of optimism and complacency after a stellar year in the markets and the tax reform package. Investor psyche was as strong as I have seen it in a very long time, as all news was good news until it wasn’t.
What if the Federal Reserve is more aggressive than previously anticipated in raising the overnight lending target? What if wage inflation picks up significantly? What if Jerome Powell is more hawkish on inflation than we thought? What if inflation spirals out of control and the Federal Reserve cranks up the overnight rate? Just forget the negative correlation between the two! They will march in lockstep moving forward because this time is different, or something along those lines.
If our worries about the Fed weren’t enough, what’s this? Tariffs on steel and aluminum? Tariffs on Chinese imports? A potential trade war with Asia? We have been preaching free trade for so long, we don’t even know how to process the word tariff and what it really means. But it can’t be good, right?
Then, what is this about Russians in Syria? Facebook’s dealings with some firm called Cambridge Analytica? Shoot, what is a Cambridge Analytica? Meetings with the North Koreans? Our friend Brexit which won’t go away? The bricks in our various walls of worry stacked up in February and March, making up for time lost in 2017.
Do you want to know what had really, and I mean fundamentally, changed since the end of the 4th Quarter of 2017? Not all that much, as we ended March not too far off from where we started the year. All of that heartache for basically nothing, or close to it.
Welcome to 2018, and we should probably get used to it.