2018 First Quarter
You would have to go back to October of 2016 to find the last month the Schwab Total Stock Market Index fund (SWTSX) had a negative return. That streak was broken in the first quarter when SWTSX was down in February and March. After a stellar January, we gave back January’s gains and then some to close out the quarter at breakeven.
Heading into 2018 I was a bit wary about the direction stocks would take in the short-term. I believe that the run-up we saw in January was due to investors chasing performance from the previous year. In February we saw inflation fears creep into the bond market and that led investors to sell their bonds which, in turn, forced rates higher. Stock investors don’t like the uncertainty that rising rates bring, so that led to the stock sell-off. I found none of this surprising. The stock market was on a torrid pace and we all knew it could not go on forever. We also know from investing in stocks that when stocks become expensive, any little thing can send the market lower.
The possible trade war between the US and China this past quarter also increased market volatility. In the end, tariffs are essentially a tax on the consumer. While it is difficult to find an economist who will tell you tariffs are good for global trade, some believe President Trump’s tariff talk was the bargaining chip he needed to open up China to freer trade. For years China has limited the number of American made goods such as automobiles that are sold in China, they have stolen US trade secrets and have abused US copyright laws all the while the trade done in the US is much freer and open. This must stop and everyone agrees with that point. Trump’s critics don’t disagree that something has to be done, they disagree with how to accomplish this feat. It seems the last few weeks of trading were completely dialed into what was going on with the trade talks. If top Chinese and US officials were heard to be talking through back channels in hopes of ending talk of a trade war, the market rallied. If China denied these talks were taking place, the market fell. Like many things in life, time will tell how this will be resolved.
By the way, the sell-off we experienced this past quarter is NOT unprecedented. These events are completely normal and are to be expected – especially if we want this bull market to continue. Over the next three months, try to avoid the headlines and instead concentrate on corporate earnings. According to the Wall Street Journal, the S&P 500 forward P/E (price-to-earnings ratio) is 16.98 versus 18.25 one year ago. How has the S&P 500 become “cheaper” over the past year while our returns have gone through the roof? You can thank the burgeoning global economy for that one. Global commerce continues to grow even though future global interest rate increases are just now starting to be priced into the market. Going forward, investors should concentrate on corporate earnings. As long as earnings stay strong, one could make the argument that the market is more reasonably valued than initially thought.
I am going to sound like a broken record here, but if you need cash for an extraordinary purchase or expense over the next twelve months please call me. Volatility has returned and I would hate to have to sell at an inopportune time during one of these market swings.