The advisors at River Wealth are committed to enriching investors by sharing their insights and understanding of the market by regularly publishing the Market Currents in our quarterly Currents Newsletter.
First Quarter 2018
Following an exceptionally long period of calm and expanding equity markets, volatility returned in February. Since then, markets have moved sharply in reaction to news reports, as investors attempt to assess the potential implications of global developments. However, underlying the seemingly endless flow of news is a fairly healthy domestic economy with low inflation, continued earnings growth and a global economy that is expanding. With this fundamental backdrop, the recent spate of volatility, largely tied to daily news and Twitter feeds, is much less concerning. When focusing on long-term financial goals and objectives, discipline and the ability to see past short-run volatility and market corrections is critical.
Global Economic Conditions – Ten years after the Global Financial Crisis, we are now in what is being referred to as a period of global synchronized growth. Every major economy worldwide is expanding economically. The U.S. is now in its ninth year of expansion and expectations are for increased economic growth, propelled by last year’s tax cuts. The International Monetary Fund now estimates that global growth will reach 3.9% this year, up from 3.7% last year and 3.2% in 2016.
Corporate Earnings – Corporate earnings growth has accelerated, largely boosted by the recent tax overhaul in the U.S., which significantly reduced corporate tax rates. Expectations for 2018 remain optimistic as analysts project double digit earnings growth to continue. Thus far, the majority of companies reporting 1st Quarter earnings have provided shareholders with positive reports.
Domestic Policy Activity – Following a year where domestic policy was a significant focus of investor attention, the current policy agenda has attracted much less attention. That could change if an infrastructure bill gains some momentum, or if trade issues reach Congress.
Central Bank Activity, Rates and Inflation – In March the Federal Reserve increased the Federal Funds rate, a widely expected move, to a range of 1.50% to 1.75%. Despite an expanding economic and employment situation, rates remain relatively low and modest inflation numbers have given the Fed room to act gradually. It is broadly expected that the Fed will increase rates three times in 2018.
Geopolitical Concerns – As has been the case for some time, underlying what seems to be a fundamentally sound economic situation is the specter of geopolitical events. Most recently, trade policy and military conflict. While a true trade war would indeed be economically disruptive, all we have seen so far is talk, not policy. Likewise, recent military action in Syria and potential conflicts elsewhere may result in short-term market reactions. Unless these become protracted military campaigns, history indicates that their market impact will be short-lived.
With volatility back in financial markets, being driven by minute-by-minute news flow, it is important to keep things in perspective, and recall that uncertainty and volatility are normal parts of investing and functioning markets. As always, we encourage you to remain focused on long-term objectives.
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