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IMPACTfolio - 1st Quarter 2018 Newsletter

Spring has sprung, and the first quarter of 2018 is officially in the books! This time of year, most of us are looking forward to warmer weather, longer days, and backyard barbecues. Another hallmark of spring, baseball, is already underway. The March 29th Opening Day for the 2018 MLB season is the earliest in League history (excluding season-openers at international venues), and for two lucky teams, the season will stretch until the Word Series at the end of October.

Over the course of the MLB season, each team will play 162 games – producing over 2,400 match ups and making the NFL season of 16 games look like a veritable sprint by comparison! With such a slew of games, played over a season than spans more than half of a year, not even the “experts” have a hope of reliably predicting which team will be taking home the Commissioner’s Trophy in October. Just think about how many expert predictions went bust when powerhouse Virginia was knocked off by unknown UMBC in the first round of this year’s NCAA tournament. And while it certainly provides an entertaining basis for friendly office pools; I would guess that most people would not be willing to make any meaningful wager on the outcome of the MLB season or the NCAA tournament before they’ve begun.

Why then, would you invest your money that way? At any given point in time, there is no shortage of “expert” market predictions. Yet, time and again, all too often these predictions end up going the same way as an NCAA tournament bracket. In fact, we need not even look beyond last year for an example. According to data collected by Bespoke Investment Group, the Wall Street consensus estimate for the 2017 year-end level of the S&P 500 Index implied that the Index would appreciate just 5.5% during the year, the most bearish estimate since 2005. So, what actually happened? The S&P 500 Index returned 19.42% over the course of the year and did it with record low volatility. Investors who had listened to the “experts” and taken money off the table would have missed out on some of the best risk-adjusted returns for U.S. stocks in years. This is just one example of why it is important to pay attention to what is happening, not what the experts tell us will happen.

Our key observations about the current market:

Despite recent volatility, US Equities remains the strongest asset class based upon the indicators that I monitor.

International Equities were the most improved asset class of 2018 and remain the second strongest asset class behind Domestic Equities. 

Finally, I’d like to briefly discuss the fixed income market. There has been sustained upward pressure in shorter-term interest rates, largely due to action from the Fed. Meanwhile, longer-term rates, which are more market-driven have fluctuated over the last several months. Rising interest rates are the enemy of traditional fixed income instruments and resulted in weakness in traditional fixed income segments such as investment grade corporate bonds and U.S. Treasuries. Currently, strength lies in segments which are not sensitive to U.S. interest rates, such as international bonds, which have also benefited from a weak U.S. dollar and convertible bonds, which have been supported by a robust equity market.  The interest rate market is one of many that I monitor regularly for new developments to maintain optimal portfolio allocations for my clients.

1st Quarter 2018 Relative Strength Scores

(Relative Strength data provided by Dorsey, Wright & Associates.)

If you would like to become more familiar with my investment process and the tools I use to identify market leadership across major asset classes and within asset classes, please contact me at your convenience.

Scott Arnold, CFP®

CEO, Portfolio Manager

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