January started off with a continuation of the bull market, but fears of inflation and of a potential policy error drove stock prices lower in February. After a short recovery, equities continued their selloff in March, with the S&P 500 dropping close to its February lows — its first major pullback since early in 2016. At that time, stocks declined 6% due to investor anxieties about slowing growth in China. Now, investors are worried about too much growth and the potential for the Fed to raise interest rates too quickly and choke off the growth. The Fed raised rates ¼ point and expectations are for further increases this year. The new Fed chair has spoken with a more hawkish tone and that has investors worried.
In addition, President Trump has initiated tariffs which has raised fears of protectionism. While the tariffs have been watered down from the original announcement, concerns still exist over future trade policy. While improving trade agreements would be welcomed, elimination of treaties and raising protectionist borders would not be good for corporate America, job creation, and for the economy as a whole.
So what started out as a continuation of the nine-year market run has turned into a pause, and volatility spiked from its historic low for equities all around the globe. The S&P 500 was off .76% for the quarter. Small cap stocks fared better, only losing .08%. The fear of a trade war also had an effect on foreign equities, with developed markets losing 1.53% and emerging markets closing up 1.42%.
The Federal Reserve raised interest rates ¼ point and investors are expecting another two hikes by year end. In contrast, the Bank of England and the European Central Bank held rates steady, while Japan’s central bank remained accommodative.
For some of our inflation hedging strategies, there was a reversal of fortune. Oil prices continued to climb and hovered around the $65/barrel price range. As a result, commodities were basically flat for the quarter. Real estate and global infrastructure had been stellar performers, but so far this year, they have provided negative returns.
As the year progresses, we’ll see if the tariffs and interest rate hikes offset any gains from tax reform. However, given good domestic and global economic growth, the backdrop remains supportive for equities. For now, the more hawkish tone of the Fed, coupled with equity prices that are already elevated, could mean volatility remains higher than it was last year.
Washington Trust Bank believes that the information used in this study was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.
Washington Trust Bank.