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Market Commentary 03/31/2018

Thoughts on Market Volatility

2018 started like a cannon shot with January’s almost daily records in the equity markets. However, the return of market turbulence in February erased all of January’s gains.  March was more like an old-fashioned roller coaster with increased up and down days winding through the ever-changing news flashes. Normal times may have returned after a fifteen-month hiatus of no volatility.  The optimism shared in 2017 by investors and their renewed appetite for stock investments show signs of changes to come if the coming second quarter aligns itself with the first quarter.

According to Bank of America Merrill Lynch, during the week of January 15, 2018, investors invested almost $24 billion into equities, bringing the cumulative four-week inflows to the strongest level ever. After piercing through 26,000 on the Dow Jones Industrial, the market reversed course in February losing 10.2% over the next few weeks.  Investors withdrew $24 billion from stock funds as their fear increased due to uncertainty.  This is a good example of an old story set in current times.  Companies, personnel, products and themes change but throughout history investors remain somewhat predictable.  They sell into market volatility, generally entering late and leaving too early.

Over the past year we’ve written about complacency and how the long uninterrupted positive market is not sustainable, so it’s no surprise that volatility is back. Volatility has been triggered by the fears of inflation, rising interest rates, and now trade tariffs.  Only three months ago investors were flooding money into the stock market on the upbeat news of tax reform and the potential for increased opportunities to participate in the upward market trend.  Investor behavior with respect to volatility in the stock market is like the weather at times; you can see it heat up with no end in sight and then a sudden event, like a storm, can cause disruptions that drive the markets down.  Today, it almost feels like a quick summer storm given all the warnings issued pre-storm.  But even with all the sophisticated technology Mother Nature is still unpredictable as to short-term damages.

Our investing philosophy has always been to anticipate and advance plan for volatility. Although 2017 was great for investment performance, looking back it was a year of risk management preparing for a year like 2018.  Although early in the year, we can certainly acknowledge that volatility has returned. We prepared for some of the downside that has prevailed during this first quarter.  Like the weather example above, when the National Weather Service tells us in advance that a storm is heading our way we prepare to take cover until the storm passes.  When markets are setting records, taking profits allows us to protect your portfolios until various conditions begin to improve.

It is hard to predict what the months ahead will bring. We can hope that the trade tariffs are only a short-term skirmish, that interest rates rise slowly, and that the fear of inflation is gradual.  It might be partly cloudy with an occasional storm, but the sun will shine again.  Even though the markets are volatile, the economy is strong, interest rates and inflation remain low and companies are reporting earnings.  Your diversified portfolio will allow you to weather the storm over the long-term and give you peace of mind.

We welcome any questions you may have as we move through these normal market conditions. We look forward to our conversations and meetings as we head into the summer months. Thank you for your continued belief in our philosophy that has worked well over the years.

 
Thomas L. Menzel, CFP®                                            
President/Principal Owner  
 
*Source: Volatility Investment Guide 2018, Calamos Investments, LLC
 

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