After a flying start to 2018, global markets suffered their first major correction in years, as volatility spiked, reports CIO Chris Ralph.
It was the best of times, it was the worst of times – or so the short-term investor must have thought. As markets opened in the New Year, the momentum of the previous quarter showed no signs of flagging. Buoyed by Donald Trump’s Tax Cuts and Jobs Act, passed on 2 November, the S&P 500 continued to strike record highs in January, as volatility on the index stooped to a 60-year low.
In February, however, everything changed. The apparent trigger of the sudden dip was the 10-year Treasury yield, as it climbed ever closer to 3%; the rise sparked fears of inflation and Fed hawkishness. The S&P 500 suffered its worst week since 2016, swiftly followed by its best day since mid-2015. Volatility also made a rapid comeback.
Over the course of the quarter, however, the S&P 500 lost just 2%. Volatility also ended the period at more typical levels, suggesting that markets may merely be exiting the ‘zombie’ period of recent years – price rises without volatility – and returning to business as usual; bad news for non-selective investors, but grist to the mill of the expert stock picker.
Investors also needed to remind themselves to look beyond the immediate market ructions to the real economy. The IMF raised its global growth forecast for 2018 to 3.9%, while January saw a positive US jobs report, and corporate earnings remained buoyant – global dividends set a new record in 2017. Apple posted healthy earnings, while Amazon reported the largest profits in its history. However, the technology sector suffered later in the quarter, due to revelations over Facebook failing to protect user data, and to Donald Trump criticising Amazon’s tax arrangements; both developments sparked concerns over the potential for constricting regulation.
The White House remained at the centre of the action over the quarter. Donald Trump imposed steel and aluminium tariffs, and later in the period introduced a further $60 billion of tariffs on a range of Chinese imports. Some stock prices slipped as a result, and China responded with tariffs of its own. Markets were more positive in their response to news that Donald Trump would meet with Kim Jong-Un in the coming months. When Jerome Powell, Donald Trump’s new Fed Chair, increased rates by 0.25% at his first rates meeting, markets simply acquiesced.
The Bank of England faced somewhat different economic conditions as it made its own rate deliberations. Growth persisted through 2017, albeit at unspectacular levels, and inflation across the first quarter hovered at around 3%, significantly above the Bank’s target. Sterling tracked upwards against the dollar over the course of the quarter, aided in part by progress in Brexit negotiations, as a transition deal was agreed. The Chancellor stuck to his pledge to deliver a light-touch Spring Statement, as both government debt and UK productivity showed signs of improving.
Nevertheless, retail trends remained negative into 2018, as the sector suffered its worst start to the year since 2013. UK stocks remained relatively unloved by global investors and the FTSE 100 fell 8%, not helped by Carillion’s collapse and Capita’s profit warning. While the transition deal was widely lauded, a leaked Treasury analysis showed that all Brexit scenarios would shave the UK growth rate; and figures from the Office for Budget Responsibility forecast a £37 billion “Brexit bill”.
Across the Channel, eurozone stocks began the year particularly well, as indices for both services and manufacturing continued to strike historic highs, although improvement rates slowed significantly late in the period. Corporate results offered plenty of encouragements, not least in the financial sector, but the MSCI Europe ex UK finished the quarter down almost 4%, in line with global trends. Eurozone politics offered divergent tales: in Germany, the two leading parties finally agreed a grand coalition; in Italy, the success of populist parties in the election left the make-up of the next coalition government looking far from clear.
Clarity was not lacking at the annual meeting of China’s National People’s Congress (NPC) in Beijing. The NPC voted unanimously to remove the two-term limit on China’s presidency, paving the way for Xi Jinping to continue his remarkable accumulation of power and remain in post long-term.
Chinese stocks moved largely in line with global markets across the period, as did Japan’s wide-ranging Topix index, which lost 5.8% over the period, despite touching a 26-year high earlier in the quarter. The country also posted its eighth consecutive quarter of positive growth, offering another reminder that short-term falls in markets do not necessarily reflect macroeconomic (or even corporate) reality.
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