Ryan P. Johnson CFA, CFP®
Director of Equity Research
The S&P 500 declined 2.5% in the month of March, resulting in a down quarter (-0.8%), but it is notable that this was just the second down quarter in the past 5 years. Interest rates remained relatively stable, and the Federal Reserve raised rates again, to a range of 1.50-1.75%.
Returns on very short-term bonds are starting to approach inflation (Core CPI) rates for the first time in 10 years. The futures markets currently expect the Fed to raise rates again 2 more times in 2018, which would put the effective Fed Funds rate around 2.2%. Longer-term bond yields have increased in recent months but stayed relatively stable in March. The 10-year Treasury has not yet reached 3%, which was last seen briefly in 2013 and not for any significant length of time since 2011. Despite higher rates, the housing market on average remains robust with both number of units sold and average selling prices higher year-over-year.
Talk of trade wars has introduced additional uncertainty into the markets. The effect has been higher volatility and lower prices (and lower price-to-earnings, or P/E, multiples). We are just about to enter first quarter reporting season which should start to highlight the positives of recent tax reform and forthcoming higher share repurchases from repatriated foreign cash. Job numbers remain strong and indicators and surveys for services and manufacturing remain solid. For example, the Conference Board’s Leading Economic Index® (LEI) just reached a 7-year high.
The S&P 500 is up 0.3% over the past 4 months, while earnings estimates have risen substantially. Now the P/E multiple is much lower than it has been in recent years. The market has gone from an elevated multiple to a more normal multiple: the forward P/E on the S&P 500 is now 16.5 compared to the average 16.1 over the past 5 years. We still view the recent pullback as a buying opportunity; putting recent IRA contributions and excess cash to work for many clients. We expect that the positive corporate environment will result in higher stock prices in the coming months/quarters, which should be supported by results from the first quarter earnings season.
RISKS AND IMPORTANT CONSIDERATIONS
Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not consider the objectives, financial situation, or particular needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.