Equity Overview

Volatility continued in March, as 7 of 21 trading days saw gains or losses of more than 1% in the S&P 500, with several days in excess of 2%.  When added to the volatility in January and February, this meant that the first quarter of 2018 was among the most volatile in the past 25 years–as contrasted with every quarter of 2017, which was among the least volatile.

Continuing the trend, investors favored growth over value stocks, and stocks in companies with positive earnings surprises did well.  But all sectors retreated except for real estate, utilities, and energy.  The FAANG stocks (Facebook, Amazon, Apple, Netflix, and Google) all lost ground.

Although stock prices have come down, consensus earnings estimates for the S&P 500 over the next year have risen as analysts have calculated the impact of the corporate tax cuts and a strengthening economy on company profits.  Thus stocks are more reasonably valued, as the forward price earnings ratio of the S&P 500, which had been a somewhat extended multiple of 19, is now closer to its historical mean of 15.

Macro Overview

The administration continued its aggressive trade policy, announcing an additional $60-billion in tariffs on Chinese imports.  China immediately threatened to retaliate with tariffs on a wide range of American products.  The real prospect of a trade war unsettled the stock market and contributed to the unusual volatility.

Nonetheless, economic statistics in March were generally positive.  Manufacturing was strong, as was employment.

After much drama, Congress avoided a shutdown and passed an omnibus $1.3-trillion spending bill which funds the government through September.  After a brief interlude during which the president contemplated a veto, he ultimately signed it into law.

In its first meeting since Jerome Powell became chairman, the Fed, as expected, raised the funds rate by 0.25% to a target of 1.50% to 1.75%.  They stated that “the economic outlook has strengthened in recent months,” and raised their forecast for 2018 GDP growth from 2.5%  to 2.7%.  The market anticipates at least two more interest rate increases this year.