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Quarterly Market Review: Q1 2018

April 18, 2018

Bozu Mekuri

 

Happy Spring everyone! 

 

I just returned from an amazing trip to Japan with the family. We had 11 perfect days of weather and cherry blossoms while visiting with my host family from 30 years ago. It was good to reflect back and see what changed, and what stayed the same.

 

One new thing from our trip was a card game called Bozu Mekuri. In the game, there are stacks of cards with three random characters: a princess, a nobleman and a “bozu”, or monk. Each player takes turns drawing a card, and the person with the most cards at the end of the game wins. But, if a “Bozu” is drawn, you forfeit all your cards. Naturally, it happens randomly and unexpectedly.

 

I bring this game up because it’s fun, but also because it reminded of me the recent market activity. After more than a year of unprecedented calm in the markets, volatility has returned. Markets spend a few days climbing higher, only to have some random and unexpected news emerge to knock it back down… and metaphorically “take all your cards”. Recent surprises included the Facebook data breach, global geo-political events and domestic political news.

 

We also appear to be in an economic transition as the strength of the economy is no longer in question and the Federal Reserve tries to navigate the return to a “neutral” interest rate policy. Markets have become accustomed to very low interest rates, so any movement towards higher rates and any new indication of an uptick in inflation is having a significant effect on the market. Market sectors suffering the brunt of these recent developments are Real Estate Investment Trusts (REITs) and utilities. The high dividend payouts from REITs and utilities are less appealing by comparison when interest rates are climbing elsewhere.

 

All these observations aside, there is no way to predict the future. For this reason, the diversification practiced in your portfolios and the risk reduction measures we employ are purposeful and designed around the knowledge that markets will experience periods of volatility. If you have any questions, please don’t hesitate to get in touch. We are always happy to discuss your portfolio and/or any other financial questions you may have, whether it be about mortgages, car loans, insurance products, second homes, long term planning, etc. We are at your service!

 

Thank you,

Greg

Economic Indicators at a Glance

 

Below you’ll find a snapshot of some top-line economic indicators, followed by the Quarterly Market Review. 

Data source: Trading Economics. 2018.

Market Summary
First Quarter 2018 Index Returns

 

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [net div.]), Global Real Estate (S&P Global REIT Index [net div.]), US Bond Market (Bloomberg Barclays US Aggregate Bond Index), and Global Bond ex US Market (Citi WGBI ex USA 1−30 Years [Hedged to USD]). The S&P data are provided by Standard & Poor's Index Services Group. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2018, all rights reserved. Bloomberg Barclays data provided by Bloomberg. Citi fixed income indices © 2018 by Citigroup.

World Stock Market Performance

MSCI All Country World Index with selected headlines from Q1 2018

 

These headlines are not offered to explain market returns. Instead, they serve as a reminder that investors should view daily events from a long-term perspective and avoid making investment decisions based solely on the news.

 

Graph Source: MSCI ACWI Index. MSCI data © MSCI 2018, all rights reserved.
It is not possible to invest directly in an index. Performance does not reflect the expenses associated with management of an actual portfolio. Past performance is not a guarantee of future results.

World Asset Classes

First Quarter 2018 Index Returns (%)

 

Looking at broad market indices, emerging markets outperformed developed markets, including the U.S., in the first quarter. The value effect was positive in emerging markets but negative in developed markets, including the U.S.. Small caps outperformed large caps in developed markets, including the U.S., but underperformed in emerging markets.   

 

  

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor's Index Services Group. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2018, all rights reserved. Dow Jones data (formerly Dow Jones Wilshire) provided by Dow Jones Indices. Bloomberg Barclays data provided by Bloomberg. Treasury bills © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).

U.S. Stocks 

First Quarter 2018 Index Returns

 

The US equity market posted a negative return for the quarter. Value underperformed growth across large and small cap indices. Small caps outperformed large caps.

 

 

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Marketwide (Russell 3000 Index), Large Cap (Russell 1000 Index), Large Cap Value (Russell 1000 Value Index), Large Cap Growth (Russell 1000 Growth Index), Small Cap (Russell 2000 Index), Small Cap Value (Russell 2000 Value Index), and Small Cap Growth (Russell 2000 Growth Index). World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. Russell 3000 Index is used as the proxy for the US market. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2018, all rights reserved.

Real Estate Investment Trusts (REITs)

First Quarter 2018 Index Returns

 

Non-US real estate investment trusts outperformed US REITs in the first quarter.

 

 

 

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Number of REIT stocks and total value based on the two indices. All index returns are net of withholding tax on dividends. Total value of REIT stocks represented by Dow Jones US Select REIT Index and the S&P Global ex US REIT Index. Dow Jones US Select REIT Index used as proxy for the US market, and S&P Global ex US REIT Index used as proxy for the World ex US market. Dow Jones US Select REIT Index data provided by Dow Jones ©. S&P Global ex US REIT Index data provided by Standard and Poor's Index Services Group © 2018.

Select Country Performance

First Quarter 2018 Index Returns

 

In U.S. dollar terms, Finland and Italy recorded the highest country performance in developed markets, while Canada and Australia posted the lowest returns for the quarter. In emerging markets, Egypt and Brazil posted the highest country returns, while the Philippines and Poland had the lowest performance.

 

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Country performance based on respective indices in the MSCI World ex US IMI Index (for developed markets), MSCI USA IMI Index (for US), and MSCI Emerging Markets IMI Index. All returns in USD and net of withholding tax on dividends. MSCI data © MSCI 2018, all rights reserved. UAE and Qatar have been reclassified as emerging markets by MSCI, effective May 2014.

Fixed Income

First Quarter 2018 Index Returns

 

Interest rates increased in the U.S .during the first quarter. The yield on the 5-year Treasury note rose 36 basis points (bps), ending at 2.56%. The yield on the 10-year Treasury note increased 34 bps to 2.74%. The 30-year Treasury bond yield rose 23 bps to finish at 2.97%.

 

On the short end of the yield curve, the 1-month Treasury bill yield increased 35 bps to 1.63%, while the 1-year Treasury bill yield rose 33 bps to 2.09%. The 2-year Treasury note finished at 2.27% after a yield increase of 38 bps.

 

In terms of total return, short-term corporate bonds dipped 0.38% and intermediate corporates fell 1.50%. Short-term municipal bonds advanced 0.10%, while intermediate munis declined 1.29%. Revenue bonds performed in-line with general obligation bonds, declining 1.19% and 1.20%, respectively.

 

 

 

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Yield curve data from Federal Reserve. State and local bonds are from the S&P National AMT-Free Municipal Bond Index. AAA-AA Corporates represent the Bank of America Merrill Lynch US Corporates, AA-AAA rated. A-BBB Corporates represent the Bank of America Merrill Lynch US Corporates, BBB-A rated. Bloomberg Barclays data provided by Bloomberg. US long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). Citi fixed income indices © 2018 by Citigroup. ICE BofAML index data © 2018 ICE Data Indices, LLC. The S&P data are provided by Standard & Poor's Index Services Group.

 

This report was prepared by Gregory Saliba.

 

 

Gregory Saliba

President, Taurus Capital Management

saliba@tauruscap.com

(503) 756-2972

 

 

 

 

20+ years in Corporate Finance, Debt Capital Markets and Investment Management

2010 Oregon Ethics in Business Award Recipient

Public Speaker on Risk, Behavioral Finance and Ethics

Finance Faculty Member (12+ years)

  • Willamette University, Atkinson Graduate School of Management

  • Portland State University, School of Business Administration

Extensive Community Involvement

 

 

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