Quarter in Review

What a quarter it was- a January to remember followed by a February and March that many wish to forget. The inflation debate remains the topic of the day notwithstanding geopolitical tensions. Each data release yields new information about the present state and prospects for domestic and global economies, while the context of monetary policy and trade risks remain quite relevant. In short, it is a very mixed bag of catalysts for markets. Some of these risks are easily quantifiable, others are… more challenging. To be sure, there have been a number of positive economic developments since the start of 2018, but worries remain regarding the trajectory of global growth and the pace of inflation. For our part, we will stick to what we can quantify from the latest raft of economic data. Our strategic synthesis is simply this: neutral (neutral US dollar on a trade weighted basis, neutral duration/ rates, and neutral equities). For the record, we are also modestly upping our fair value for the S&P 500 to 2740 from 2735 as the second quarter kicks off and earnings season begins.

There are reasons for optimism and reasons for caution. By our numbers, the reasons for optimism are relatively large in number but small in magnitude, while the reasons for caution are relatively small in number but large in magnitude. The nature of the arguments on both sides are different but seem equally valid. So, the best course of action seems to be one of cautious optimism as we begin the second leg of our journey in 2018. Vigilance is key across risk assets as both stocks and bonds are squarely in the red for the year.

Items on the horizon that we will be keeping a close eye on: earnings season, jobs reports, inflation data, central bank conclaves, geopolitics etc… Same as it ever was, I suppose. However, the demeanor of financial markets has shifted quite dramatically in the past several weeks and we must plot our course accordingly. The Powell Fed has inherited a tricky environment; it will be interesting to see where they go from here. Jerome “Jay” Powell received his Senate confirmation on Januray 23 to become Fed Chairman… that was three days before the market reached its all-time high. The S&P 500 went on to register its first quarterly drop in over two years. In terms of quarterly performance, bonds did not fare much better. I have a feeling Mr. Powell has David Byrne’s words echoing in his ears, “How do I work this?” It is noteworthy that VIX also commonly referred to as the fear gauge rocketed from a reading of 9.15 on January 3 to 33.46 by February 8 of this year. This “move” represents a multiple of 3.66 from low to high. For those keeping track at home, the low to high VIX multiple during the financial crisis was 4.96, so what we have experienced thus far in 2018 does bear some semblance to times a decade ago. You could also say we have experienced roughly three quarters of the gyrations of the financial crisis in the first three months of 2018. Total Wealth Portfolios have adapted to the change in market dynamics and capitalized on volatility on multiple occasions during the first quarter, so our message is quite simple: keep calm and carry on.

Market Outlook: Neutral USD, Neutral Rates, Neutral Equities