Tom Wald, CIO, Transamerica Asset Management Inc.
Equity markets created their own version of March Madness during this past month, and it certainly rivaled the action seen on the hardwood as a confluence of occurrences served to ramp up market volatility and send the equity markets into correction territory for the second time since early February.
These market-shaking developments included:
- Fears of a pending trade war with China in association with the steel and aluminum tariffs announced by the White House the first week in March, which were then augmented by an additional $60 billion on more Chinese goods announced on March 22. This is believed to be the major downside contributor to the Dow Jones Industrial Average drop of more than 1,100 points March 22–23, which amounted to a decline of over 5%. Here, we believe it is important to note that this $60 billion only represents about 12% of the total annual U.S. imports from China. At the current time, we believe this level is unlikely to have any meaningful negative impact on the U.S. economy. Only in the event that far greater escalation of trade restraints occur would deterioration to U.S. growth be a potential risk. Therefore, we believe investors could find it most prudent not to submit to the equity market’s pressure stemming from the recent tariff announcements, which could still prove to be a negotiating tactic regarding future trade agreements.
- These trade concerns were exacerbated one day after the Federal Reserve (the Fed) concluded its first meeting under the leadership of new Chairman Jay Powell. At that meeting, the Fed, as expected, increased the Federal Funds rate to a target of 1.5%–1.75%. In his first press conference, Powell expressed confidence in an improving U.S. economy evidenced by an upgraded Gross Domestic Product (GDP) forecast to 2.7% from 2.5% in 2018 and 2.4% from 2.1% in 2019. Nonetheless, the market may have focused on this as more of a hawkish view of monetary policy, potentially resulting in a fourth rate hike this year and two more in 2019. So despite the economic confidence expressed by the Fed, this March meeting likely added to the downside volatility in stocks.
- Also, bellwether social media stock Facebook took a pounding during this same week as news of an alleged misuse of personal data sent investors pushing the “angry face” button. As a result, the stock dropped 14% during the third week of the month, totaling an 18% drop from its late-January high. This likely also added to the negative sentiment during the month.
- Finally, short-term technical indicators in the market weakened, creating rapid late-day selling March 22–23 as the market fell to, and could not sustain, short-term support levels. While this certainly seemed a bit unnerving, it is not unusual for market corrections, as eventually all selloffs find bottoms and buying opportunities based on longer-term fundamentals.
A few points to take into account given the air ball the market tossed up this past month.
- We still very much like the outlook for both U.S. and global growth in 2018. While the first quarter will probably represent the lowest year-over-year pace, as it has for the past three years, after that we believe U.S. GDP could challenge 3% growth for 2018 and global growth could challenge 4%.
- The corporate earnings environment also continues to look strong as we see an increasing probability that S&P 500® earnings could potentially reach mid-teens year-over-year growth for both the first quarter and for 2018 overall. We believe such earnings growth amid a stronger economic backdrop could ultimately drive stocks higher in 2018.
- Stock valuations, for the most part, remain reasonable, in our opinion, as the S&P 500 is now at about 17 times 2018 earnings estimates, which given the expected earnings environment, we believe provides for the prospect of equity total returns in line with earnings growth
- With credit spreads now having widened about 0.50% on high-yield bonds since late January (ICE Bank of America Merrill Lynch US High Yield Master II Option-Adjusted Spread from 3.25% to 3.75%) and BBB bonds about 0.30% (ICE Bank of America Merrill Lynch Option-Adjusted Spreads from 1.15% to 1.45%), we believe this could potentially be an appropriate time to focus on lower-duration bond portfolios focusing on improving credit opportunities in what we believe should be a strengthening economy throughout the rest of the year.
Unlike the NCAA Tournament’s March Madness, we do not expect an end to market volatility when the nets are cut down the first Monday in April. With this in mind, we believe investors could be well served to enjoy the Final Four, brace for continued volatility, and keep a long-term perspective in mind.
About the author
Tom Wald is responsible for overseeing the investment and mutual fund product development functions and sub-adviser selection process. He also actively publicizes Transamerica’s investment thought leadership and products to advisors, clients, and the media. Tom has more than 25 years of investment experience and has managed large mutual funds and sub-advised separate account portfolios. Tom holds a bachelor’s degree in political science from Tulane University and an MBA in finance from the Wharton School at the University of Pennsylvania. He has earned the right to use the Chartered Financial Analyst (CFA®) designation.
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