Mike Loewengart, Vice President of Investment Strategy
E*TRADE Capital Management
It was March madness on and off the basketball court. The frenzied early rounds of the NCAA tournament included a host of upsets, including a number 16 seed beating a 1 seed for the first time ever. As for investors, by month-end some may have been left hoping their portfolio wasn’t as busted as their bracket. Perhaps exacerbated by still-lingering jitters from February’s correction, several developments had the market on its heels.
It wasn’t a surprise that the Federal Open Market Committee raised the fed funds rate by another 0.25% to 1.50–1.75%. But a more hawkish tone from Chairman Jerome Powell seemed to put an edgy market on the lookout for the end of the current “Goldilocks” scenario, where the economy continues to accelerate despite Fed tightening.
Geopolitical concerns ramped up, too. Global investors spent much of the month trying to determine whether the Trump administration’s new tariffs would curb foreign investment and spark countermeasures. First it was tariffs on steel and aluminum imports and then possible levies aimed at deterring Chinese investment in US technology.
Speaking of tech, it took one on the chin in March and weighed on market performance. Among other developments, data privacy issues were a concern for the sector following news that political consulting firm Cambridge Analytica misappropriated data from Facebook users in political ad targeting.
It wasn’t all airballs, though. The final estimate of fourth quarter gross domestic product jumped to 2.9% from 2.5% previously, even beating estimates. That improved reading suggested the economy still had its footing and matched Powell’s overall positive view. “Indeed, the economic outlook has strengthened in recent months,” he said at the Fed’s March press conference. “Several factors are supporting the outlook: fiscal policy has become more stimulative, ongoing job gains are boosting incomes and confidence, foreign growth is on a firm trajectory and overall financial conditions remain accommodative.”1
Source: The Federal Reserve
Historically, equities have done well in March. Heading into last month, the Dow Jones’ average March return over the past 30 years was 1.16%, and closed higher 67% of the time—numbers that are far better than the Dow’s average performance in January, for example.2
But maybe amid all the uncertainties investors should have known the Ides of March would have a little extra kick this year. The Dow tumbled 5.7% for the trading week that ended March 23, the index’s biggest weekly percentage loss in more than two years.3 A late push higher in the month’s final week helped, but the Dow (-3.70%), Nasdaq (-2.79%), and S&P (-2.54%) all ended in negative territory. The small-cap Russell 2000 (+1.29%) was a bright spot, though, perhaps with investors looking more toward domestic-focused companies amid the tariffs talk.
Individual sector returns were quite disparate. The defensive-oriented utilities (+3.76%) and energy (+1.66%) sectors performed the best, being the only sectors to post positive total returns. Weighing on equities were financials (-4.31%), perhaps due to falling Treasury yields at the end of the month, as well as tech’s (-3.90%) data privacy issues.4
There weren’t too many places to hide abroad either. Stocks struggled, though they held up relatively better than their US counterparts. Developed markets outperformed their emerging market peers, with the MSCI EM Index (-1.98%) besting the MSCI EAFE Index (-2.30%).
Markets seemed to be confused about whether a trade war was a real threat to global economic growth or simply a blusterous opening bid in a negotiation. Following the tariff salvo from the Trump administration, the Chinese Commerce Ministry warned certain US goods would be subject to higher tariffs and that more were on the way.
Adding uncertainty may have been softer economic data out of Europe. Among others, eurozone business activity slowed for a second straight month in March. Also, the Citi Economic Surprise Indicator, which measures economic data releases against expectations, had the eurozone at its lowest in two years.3
Skittish equity investors may have made their way over to the bond market in March. But that doesn’t mean bonds provided the clearest view of the overall market picture, as the flattened Treasury yield curve remained an area of intrigue. Generally, the flatter the curve, the weaker the forecast is for economic growth.
The difference between short- and longer-term US Treasury yields narrowed to a level last seen in 2007, perhaps reflecting what could be a tug-of-war between economic growth and the possibility of a more aggressive Fed.
Even with the Fed’s latest baby step toward normalized monetary policy, yields fell across most maturities. Treasuries were a highlight, especially among the longest-dated maturities. Foreign government debt also performed well, likely helped by a weakening US dollar and investors seeking safety from volatile equities. Corporate bonds hurt returns, especially high yield, and showed their correlations with equity as investors took risk off the table. Investment-grade and high-yield corporates were negative. And for the first time this year, taxable bonds outperformed municipal bonds.
The bottom line
March seemed to give investors another heads-up that volatility is the norm in 2018. But volatility doesn’t have to bust portfolios like that 16 seed did to tournament brackets. In our view, it’s a reminder to stack a portfolio with a healthy mix of equities and bonds to prepare for all types of market scenarios over the long term.
In spite of the recent volatility, and perhaps because of it, investment opportunities persist in the current environment:
- Bargain hunting. If investors liked US equities at the start of the year, valuations look even more attractive, as stocks are now not far from the February lows. Small caps, which are typically more domestically oriented, could become particularly attractive should global pressures ramp up.
- New locales. A brighter global growth story may offer opportunities. We at E*TRADE Capital Management recently bumped up the foreign equity allocation in our managed portfolios from approximately 25% to 35%. In our view, this rebalance may increase returns and reduce risk without sacrificing liquidity or materially increase the cost of investing. Additionally, commingled investment vehicles like mutual funds or exchange-traded funds could be easy ways to gain access. Multinationals could provide indirect opportunities in this increasingly globalized economy as well.
- Down but not out. Fixed income rates aren’t climbing across the maturity spectrum, but where they have risen, so too have the opportunities for investors seeking income. For example, the yields on short-term bonds may soon be too attractive to ignore.
Even when the market seems to be scrambling to find its equilibrium, investors can still find opportunities to keep their portfolios on track. And now may be as good a time as any in recent memory to find value.
As always, thank you for reading.
Vice President, Investment Strategy
E*TRADE Capital Management, LLC
Andrew Cohen, CFA
Director, Investment Strategy
E*TRADE Capital Management, LLC
Mike Loewengart is the Vice President of Investment Strategy for E*TRADE Capital Management, LLC. Mike is responsible for the asset allocation and investment vehicle selections used in E*TRADE’s advisory platforms. Prior to joining E*TRADE in 2007, Mike was the Director of Investment Management for a large multinational asset management company, where he oversaw corporate pension plan assets. Early in his career, Mike was a research analyst focusing on investment manager due diligence for the consulting divisions of several high-profile investment firms. Mike holds series 7, 24, and 66 designations, as well as the Chartered Alternative Investment Analyst (CAIA) and Certified Investment Management Analyst (CIMA) designations. He is a graduate of Middlebury College with a degree in economics.
Andrew Cohen is a Director of Investment Strategy for E*TRADE Capital Management, LLC. Prior to joining E*TRADE, Andrew was the Director of Investments and Operations for a large Registered Investment Advisor, where his responsibilities included investment manager research, asset allocation, and portfolio construction. Previously, he was a Senior Research Analyst and Team Leader for a leading wealth management platform. He is a CFA charterholder and a member of both the New York Society of Security Analysts and CFA Institute. He is a graduate of Virginia Tech with a B.S. in Finance.
1. “Transcript of Chairman Powell’s Press Conference, March 21, 2018.” https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20180321.pdf
2. “Stock market standoff,” E*TRADE Financial Corporation, 26 Feb. 2018. https://us.etrade.com/knowledge/markets-news/commentary-and-insights/active-trader/stock-market-standoff
3. Otani, Akane; Gold, Riva; and Wursthorn, Michael. “U.S. Stocks End Worst Week in Years,” The Wall Street Journal, 23 Mar. 2018. https://www.wsj.com/articles/stocks-slide-as-trump-kicks-off-trade-war-1521765378
4. Morningstar Direct. S&P 500® Index: Total returns. Retrieved 30 Mar. 2018 from Morningstar database.