Weekly Market Commentary March 26, 2018

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A sharp selloff in the last part of the week caused the S&P 500 to post its worst weekly loss since early 2016. The S&P 500 dropped just less than 6%. The global MSCI ACWI slid 4.4%, and the Bloomberg BarCap Aggregate Bond Index was basically unchanged. Year-to-date, the S&P 500 is down 3.2%.

Key points for the week

  • Stocks posted their worst weekly results since early 2016.
  • Protectionist trade policies and the Fed’s comments concerned investors.
  • Facebook’s data breach: Even highly successful companies have risk.

Market Analysis

Last week’s downdraft can be traced to three causes:

  • Protectionism: Risks of a trade war increased, and more stocks benefit from freer trade than are likely to benefit from protectionist policies.
  • Federal Reserve: After sifting through the Fed’s communications regarding last week’s interest rate increase, investors were worried the Fed would raise rates more than originally expected.
  • Facebook: A data breach poses a risk to user growth and reinforces the fact that even investing in wildly successful companies with great business models still carries risk.

Our view is all of these concerns are legitimate, but investors overreacted.

Investors should discount the rhetoric around trade. President Trump is much more comfortable than either Presidents Bush or Obama were with public negotiations, and the rhetoric reflects his preferences. The Federal Reserve did seem modestly more inclined to raise rates in future years, but it could easily adjust as future data warrants. Facebook’s data breach was important and should have pushed its shares lower. Instead, it contributed to a broad selloff across multiple sectors.

 

The more significant message is investors and fundamentals are making the strange calm of 2017 a thing of the past. The chart above shows the S&P 500’s weekly performance since the beginning of 2017. There have already been five weeks that posted bigger declines than the worst weekly decline last year. There have also been four weekly increases that were larger than any weekly increase in 2017. 2018 has clearly been more volatile than 2017.

While the market is jumping sharply up and down, fundamentals remain solid. As we note in the market perspective below, markets often shoot sharply lower over risks that fail to materialize. Investors should not derail their investment plans on the potential overreaction by other investors to events of moderate importance.


 Market Perspective

The decline in the S&P 500 this week was the largest weekly decline since early 2016. It raises the question: What pushed the market sharply lower in early 2016? The primary two causes were concerns over China’s currency weakening and low oil prices. A CNN article on the decline also included a blurb about Apple breaking $100 and the next stop being $65.

None of those risks undid the market. The Chinese currency moved lower and then rallied in 2017. Chinese stocks struggled in 2016 but rebounded sharply in 2017. Oil prices have nearly doubled, and Apple is trading close to $165, not $65. Declines like the one this week are challenging but not necessarily good predictors of future results.


Fun story of the week

Store clerks found a $1 million lottery ticket

Store clerks in Salina, Kansas did something that many people would never do. They found an unsigned lottery ticket on the floor worth $1 million and returned it to the rightful owner. The owner’s brother was supposed to go into the store and check the lottery tickets, but he unknowingly dropped the winning ticket on the floor because he wanted to make it back home in time for March Madness. It goes to show you just how important basketball is in Kansas.


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