Market Corrections and the First Quarter of 2018

End of quarter one graph

Q1 is in the books. It sure was turbulent. A significant streak was broken. It was the first quarter in ten that was a decliner. The S&P 500 had been up in nine consecutive quarters. The last decline was Q3 of 2015. It has been a remarkable run. However, it hasn’t necessarily been normal. It seems like a lifetime ago, so you might have forgotten that January started like a rocket ship, with the S&P surging 5%. A 5%+ gain in January has occurred 12 other times. All 12 of them closed the year in the green. 1987 was one of those years. There was a massive correction that Fall of ‘87. It was ugly. The Stock Market fell 23% in one day, forever known as Black Monday. But it certainly cleared the decks for a new uptrend to emerge. Corrections do that, even the most extreme varieties. This correction has been in fact a return to normalcy. But many people have seemingly forgotten what normal is these days. When you consider everything going on from Washington to around the world, what exactly is normal anymore? It’s a bit of a rhetorical question I suppose.

There’s a growing group who seems concerned the Bull Market is over. We don’t share those concerns. This Bull just turned 9, making it the second longest and second largest Bull Market in the post-war era. It is unquestionably mature. We see more runway ahead, the path has just become slippery. The DOW was the first index to crack, and that happened in February. Tech stocks held in quite well during that period, maintaining strength and leadership. No longer. Tech got hit hard the last 2 weeks of March, leading the downside in the second stage of the correction. It needed to happen. We believe we are pretty far along in this correction. A re-test of the lows remains very likely, something we’ve prepared for all along. The big question in our minds, which we are now pondering, is what will assume leadership on the other side. Will Tech regain its dominance or will it be a new sector like Energy or Health Care that are much cheaper and haven’t participated in the rally like Tech stocks? We are studying these trends very closely and positioning portfolios accordingly.

For the time being, we stay in defense mode. The correction has been healthy but it has also caused some damage. Money has been flowing back into Bonds for the first time this year. Bonds have underperformed for 2 years now. The yield curve is flattening again and global credit is tightening a bit. These are signs that suggest there could be a problem developing out on the horizon. But that’s a 2019 or 2020 story most likely. Earnings are still set to grow at a double-digit rate this year and the US economy has been growing faster than previously thought. The correction continues and the Bull still lives.

We are finalizing our Spring Newsletter, which will go out next week with our thoughts and action plans heading to Summer and the rest of the year. Volatility is back and we see it continuing. Keep those seatbelts buckled.

Have a nice weekend. The Market will be closed Friday in observance of Good Friday. Our office will be closed too. Happy Easter.

We’ll be back, dark and early on Monday.


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