March 2018 Market Summary by Jack Moller, CFP®Submitted by Moller Financial Services on April 11th, 2018
Major Turning Point? Or, Consolidation in Ongoing Trend?
This has been a very interesting year to say the least with an accelerating rise in January to new all-time highs followed by February and March sharp selloffs (with bounces) as volatility returned with a vengeance. The important question is whether we are seeing major market shifts and regime changes or simply corrections within continuing trends. Looking at recent market action in a few key markets:
The selloff since the late January highs in the S&P 500 has certainly been sharp, however it remains within the bounds of a normal correction, i.e. less than a 20% decline. In fact, the market averages one 10%-plus decline per year. Perhaps, just as importantly with its most recent (early April) decline it has been bouncing around its 200-day simple moving average trend line. (Note this moving average is the average price over the most recent 200 days. The line is drawn by calculating this number each day and plotting it as a line.) The moving average is commonly used as the dividing line between an uptrend and a downtrend. A decisive break under the line would likely confirm a new downtrend is in progress. On the other hand, a bounce from here might be a very positive omen, representing a successful “re-test” of the line. This seems to be a critical level to keep an eye on.
The dollar declined for most of 2017 and into January this year. Since a low in late January, the dollar has bounced (more or less the mirror image of the stock correction) going mostly sideways for the last couple months with slight tilt higher. It seems to me that with all of the trade war talk in the news, that this administration will likely be very intent on competitively devaluing the dollar. However, counterbalancing that is the fact that the Federal Reserve is the only major central bank in the world raising interest rates which might serve as a magnet attracting funds into our dollar-denominate debt. We will see how this tug-of-war plays out.
Much of the recent volatility was nominally sparked by the surprising upturn in employment costs reported as January turned to February. Certainly, inflation has modestly picked up and concerns of deflation have mostly disappeared. Nonetheless, inflation as measured by “core CPI” (consumer price index excluding the volatile food and energy sectors) remains roughly in the middle of the tight range of 1%-3% where it’s been for most of the last 20 years. It’s hard to see any imminent break out for inflation any time soon as there really seems to be some major countervailing forces doing battle with technology and outsourcing putting downward pressure on prices while extraordinarily easy monetary policies continue to be in place by central banks worldwide likely putting upward pressure on prices.
The story with interest rates and the bond market has been a bit different. As mentioned, the Fed has been raising short-term rates and is indicating more hikes are in store for 2018. So, while short-term rates have risen, bond prices (which move inversely to long-term rates) have correspondingly fallen. Many analysts want to declare the end to the epic 35-year bull market in bonds as the 10-year note yields rose to near 3% (from a low of under 1.4% in 2016). Yet, there seems to be some real resistance as bond prices have bounced and rates have fallen with 10-year yields falling back to about 2.75%. So, for now, it seems too early to declare an end to this bull market in bonds. Stay tuned.
I think we are at a very important juncture at this time in many markets. Further, I believe it is important not to be dogmatic but to remain disciplined and avoid emotional reactions with our long-term investment strategies.