Our Chief Investment Officer, Eric Cramer, gives a brief 2018 first quarter recap and an overview of the markets going into the second quarter for 2018.
Thanks for listening today. Please join us for one of several upcoming BIP 2018 Quarterly Market Report presentations.
QUARTERLY MARKET REPORT PRESENTATIONS
APRIL 26 AT 12:00PM
MAY 3 AT 12:00PM
MAY 8 AT 12:00PM
APRIL 25 AT 12:00PM
MAY 1 AT 12:00PM
MAY 2 AT 12:00PM
QUARTERLY MARKET REPORT WEBINAR
Uncertainty, volatility, chaos! Yep, the markets are back to normal.
Investors who mistook 2017 for a normal year are likely to disappointed in how 2018 is unfolding. The calmness of 2017 was remarkable, with the MSCI ACWI IMI Net Global Equity index producing a positive return every month for stock market investors. Even bond market investors saw the Bloomberg-Barclays U.S. Aggregate Fixed Income index produce a win in 8 out of 12 months.
So far in 2018, the stock market and the bond market have been dishing out unexpected pain and suffering to anyone using a rear-view mirror to invest. Equities were down in two of the first three months, as was fixed income. The size of the swings are bigger too; investors who watch the market on a daily basis are no longer surprised when the Dow Jones Industrial Average opens the trading day 300 points in one direction and closes 300 points in the other direction.
What’s going on? Well, as our headline suggests, this is actually quite normal. The list of issues the market is concerned with is new, and changing on a daily basis, but the volatility is normal. One measure of the stock market’s expected volatility is called the “VIX”, though it is formally known as the Chicago Board Options Exchange Volatility Index. Its long-term historical average is around 20, using data going back to the release of live data in 1993, but it hovered just above 10 for most of 2017. So far in 2018, we’re running at near 20 on most days, which is why we say this market is actually quite “normal”.
A number of records for the “VIX” were set in October and November of 2008, as the great recession caused markets to gyrate wildly. The all-time intra-day record occurred on November, 20th of 2008, when the VIX hit an astronomically high 80.86! The Dow Jones Industrial Average fell 872 points, or 5.6%, in that day. So just to keep that in perspective, if you’re sweating today’s market, and know that a drop like this would equate to a fall of 1350 points from the index at the level reached at the end of Q1 (24,103).
Looking forward, the markets have plenty to worry about: a trade war with China, an escalation of the military conflict in Syria that could extend into Iran and Russia, pressure by the Federal Reserve to push up short-term interest rates, the shrinking of the balance sheet by the Fed (we’re calling it quantitative tightening), Robert Mueller’s probe into the President, a rapidly rising budget deficit, etc., etc. The final outcome of all these issues is largely unknown, with the exception probably being the rising budget deficit.
This list of issues is keeping the financial media on its toes. On any given day, the market is either falling, because some bad news hits the wires, or it’s rallying, because some issue got resolved. And since most financial web sites like to run stories that reflect the most recent behavior of the markets, they are having to switch out their stories much more rapidly than before. Our recommendation is to not take any of these stories too seriously, because the story can change so quickly.
Thanks for listening today. This is Eric Cramer, Chief Investment Officer at BIP Wealth. Goodbye for now and I look forward to seeing you at one of our upcoming Quarterly Market Report lunches, or on the webcast.
Disclosure: This communication contains general investing information that is not suitable for everyone and is subject to change without notice. Past performance is no guarantee of future results and there is no guarantee that any views and opinions expressed will come to pass. The information contained herein should not be construed as personalized investment advice, tax advice, or financial planning advice, and should not be considered a solicitation to buy or sell any security. Investing in the stock market and the bond market involves gains and losses and may not be suitable for all investors. The Global Equity index is the MSCI ACWI IMI Index, which is a free float-adjusted market capitalization weighted global index selected as the best available proxy for a diversified stock portfolio consistent with modern portfolio theory. Approximately 55% of the index is comprised of the U.S. stock market and 45% is comprised of international stock markets, including both developed and emerging countries. The “Net Total Return” version of the index is reported here, which means the index reinvests dividends after the deduction of withholding taxes, using a tax rate applicable to non‐resident institutional investors who do not benefit from double taxation treaties. The Emerging Market index is the MSCI Emerging Markets Gross Index. The U.S. Fixed Income index is the Bloomberg Barclays Capital U.S. Aggregate Bond Index, which is a broad-based benchmark selected as the best available proxy for a high quality, diversified fixed income portfolio suitable for a U.S. investor. It is comprised of the Barclays Capital U.S. Government/Credit Bond Index, the Mortgage-Backed Securities Indices, and the Asset-Backed Securities Index. It is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, with maturities of at least one year, and an outstanding par value of at least $100 million. The “Total Return” version of the index is reported here, which means that dividends are included and reinvested. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. It is not possible to invest directly in this or any other index.