Stocks Commentary
Previous

This is -Normal?

April 2018

Stocks rallied throughout January, with the S&P 500 climbing a whopping 7.5% at one point prior to month-end, only to experience a precipitous decline as interest rates moved markedly higher on inflation fears, leading to a revaluation for stocks. Interest rates/inflation have an inverse relationship with the valuation multiples investors are willing to pay for future earnings – higher interest rates/inflation = lower forward earnings multiples for stocks. Equities regained their footing in early February after a two-week period in which the S&P 500 entered correction territory (10%-20% decline peak-to-trough), rallying 7.8% from its year-to-date low on February 8 through March 12. From March 12 through month-end, stocks gave back much of their gains from the prior month due to a triumvirate of noteworthy events: an ongoing trade spat with China and tit for tat tariff announcements; escalating tensions between the European Union and Russia due to the poisoning of a former Russian spy on U.K. soil; and allegations that tech bellwether Facebook sold user data to Cambridge Analytica, leading to calls for boycotts of social media platforms and increased governmental oversight of technology firms. After all that, on a total return basis during Q1, the S&P 500 declined 0.7%, the Russell 2000 was flat, international developed market stocks (MSCI EAFE) fell 1.6%, while emerging markets (MSCI EM) rose 1.2%.

A picturesque backdrop for global equities last year lulled investors into believing that the good times would roll on into 2018, making the late January spike in volatility even more painful than it would have been coming off of a more “normal” year. The CBOE Volatility Index, or VIX, hovered around 20 at March-end after spending much of 2017 closer to 10 - its historical average has been 19.4 since 1990. The S&P 500 has experienced a year-to-date peak-to-trough drawdown of over 10%, versus last year’s max drawdown of less than a 3% decline. With the return of volatility and multi-directional trading, markets are again functioning normally. Investors now need to come to terms with the realization that last year was an outlier in many ways, and was an environment that is likely not to be replicated in the near-term. Elevated volatility brings with it fear, but also opportunity, and is cause to review our thesis in an effort to strengthen process and ensure that we’re not missing something. In this case, little has changed to alter our overweight stocks relative to bonds call and our call to overweight international markets.

At the end of March, the analyst consensus estimate for full-year 2018 S&P 500 earnings was $157.80, up from $147.24 at the end of December, implying 18.5% earnings growth over full-year 2017. At the end of March, after falling 1.2% in price over the first quarter and with earnings expectations moving higher, the S&P 500 traded at 16.7 times projected 2018 earnings, versus 18.1 times at the end of 2017. With earnings estimates climbing higher and stock prices moving lower over the course of the quarter, domestic large-cap stocks now sit not far from their long-term historical average forward price-to-earnings ratio of around 16. Fundamental underpinnings at present remain supportive of current valuations for U.S. large-caps, while investor sentiment on stocks has soured of late from excessively optimistic levels in late January, a positive contrarian indicator. As 1Q18 earnings season begins later this month, we will be monitoring forward guidance. In the face of talk on tariffs, companies may be more conservative than anticipated, setting up a potential under-promise/over-deliver situation as the year progresses and trade war fears are ultimately alleviated.

On the surface, international developed markets (MSCI EAFE) didn’t fare that badly during 1Q, falling 2.4% in price, but EAFE’s return in U.S. dollars (USD) masked market weakness in local currencies. The Nikkei 225 in Japan declined 7% during the quarter in yen, while falling only 1.6% in USD as the yen strengthened substantially versus the dollar. The blue-chip Eurostoxx 50 Index fell 3.8% in euros during the quarter, declining only 1.6% in USD. A 4.2% decline for Germany’s DAX Index in USD – down 6.3% in euros - during the quarter was most unsettling. Germany is an important bellwether for the health of the Eurozone economy as a whole as its tentacles extend far and wide. Further weakness in the DAX could portend tough sledding ahead for EAFE. We remain overweight international equities relative to our strategic target, but international-developed markets must climb a substantial wall of worry.

Source: Bloomberg, Factset

Next

On a scale from 1 to 5, with 1 being 'Not Good' and 5 being 'Excellent', how would you rate this article?

Press enter to submit your rating

Rate this Article

Use this form to provide additional feedback based on the rating you provided.

Thanks for Rating

Would you like to provide feedback?

Thanks for your feedback!

The content and any portion of this newsletter is for personal use only and may not be reprinted, sold or redistributed without the written consent of Regions Bank. Re¬gions, the Regions logo and other Regions marks are trademarks of Regions Bank. The names and marks of other companies or their services or products may be the trademarks of their owners and are used only to identify such companies or their services or products and not to indicate endorsement or sponsorship of Regions or its services or products. The information and material contained herein is provided solely for general information purposes. Regions does not make any warranty or representation relating to the accuracy, completeness, or timeliness of any information contained in the newsletter and shall not be liable for any damages of any kind relating to such information nor as to the legal, regulatory, financial or tax implications of the matters referred herein. This material is not intended to be investment advice nor is this information intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only current as of the stated date of their issue. Regions Wealth Management is a business group within Regions Bank that provides investment, administrative and trustee services to customers of Regions Bank.

Neither Regions Bank nor Regions Institutional Services (collectively, “Regions”) are registered municipal advisors nor provide advice to municipal entities or obligated persons with respect to municipal financial products or the issuance of municipal securities (including regarding the structure, timing, terms and similar matters concerning municipal financial products or municipal securities issuances) or engage in the solicitation of municipal entities or obligated persons for such services. With respect to this presentation and any other information, materials or communications provided by Regions, (a) Regions is not recommending an action to any municipal entity or obligated person, (b) Regions is not acting as an advisor to any municipal entity or obligated person and does not owe a fiduciary duty pursuant to Section 15B of the Securities Exchange Act of 1934 to any municipal entity or obligated person with respect to such presentation, information, materials or communications, (c) Regions is acting for its own interests, and (d) you should discuss this presentation and any such other information, materials or communications with any and all internal and external advisors and experts that you deem appropriate before acting on this presentation or any such other information, materials or communications.

Employees of Regions Asset Management may have positions in securities or their derivatives that may be mentioned in this report or in their personal accounts. Additionally, affiliated companies may hold positions in the mentioned companies in their portfolios or strategies. The companies mentioned specifically are sample companies, noted for illustrative purposes only. The mention of the companies should not be construed as a recommendation to buy, hold or sell positions in your investment portfolio.

This communication is provided for educational and general marketing purposes only and should not be construed as a recommendation or suggestion as to the advisability of acquiring, holding or disposing of a particular investment, nor should it be construed as a suggestion or indication that the particular investment or investment course of action described herein is appropriate for any specific retirement investor. In providing this communication, Regions is not undertaking to provide impartial investment advice or to give advice in a fiduciary capacity.

*Investment, Annuities and Insurance Products

  • Are Not FDIC Insured
  • Are Not Bank Guaranteed
  • May Lose Value
  • Are Not Deposits
  • Are Not Insured by Any Federal Government Agency
  • Are Not a Condition of Any Banking Activity