Pullbacks – The Importance of Principles
Weekly Commentary, February 2nd, 2018
- Equity markets came back to reality a bit this week as the S&P 500 dropped 3.88%, while international stocks (EAFE) were down 3.59%.
- Fixed income markets also saw drawdowns with interest rate moves hitting high-quality bonds (AGG) -0.86% and risk-off market actions hitting high-yield bonds (JNK) -1.32%.
- Volatility Returns – with the S&P 500 and EAFE down almost 4% for the week, they are both set to surpass eithers worst drawdown during all of 2017. The S&P 500 loss is its worst weekly loss since the lead up to the 2016 Presidential election. A lot of the drop is being attributed to markets pricing in tighter monetary policy if inflation driven by wage growth accelerates.
- Earnings Update – Generally speaking, the backdrop for future growth looks good. Bloomberg noted, “Aided by synchronized economic growth across the world and a cut in corporate taxes in the U.S., the pace of global earnings upgrades in 2018 is the fastest in at least a decade.” Meanwhile, to date earnings growth is coming in strong yet again with S&P 500 stocks on pace to see earnings growth of +12% and NASDAQ stocks on pace for +30% growth.
- Bond Market Volatility – High-quality bonds, investors historic safe-haven, took a hit along with stocks this week as interest rates continue to crawl higher, climbing over 2.80% on the 10-year Treasury (a 0.33% move in a month which is a big move).
- Federal Reserve – met this week in what was Janet Yellen’s last meeting as Chair. As expected The Fed left rates unchanged but indicated they are moving forward with increasing their efforts to reduce their balance sheet of bond holdings from a pace of $10 billion in Q42017 to $20 billion this quarter up to $50 billion by Q42018.
- Commentary: Are the principles governing your investments and financial plan so sound as to enable you to ride out volatility, and even profit from it? For many, the answer is no. Below are some thoughts on facts investors need to know, and the principles that govern our methodologies.
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