by Connor Darrell, Head of Investments
Last week brought with it a slew of positive new developments, both economically and geo-politically. Q1 GDP growth exceeded estimates, corporate earnings continued their positive momentum, and small steps were taken toward officially declaring an end to the Korean War (at long last). Despite all of the good news however, both equities (as measured by the S&P 500) and bonds (as measured by the Bloomberg Barclays US Agg) finished flat for the week. Bond markets have faced headwinds all year from increasing interest rates, but we continue to emphasize that rising interest rates do not necessarily mean doom and gloom for bond investors. While shifting interest rates will cause some volatility in bond prices, investors who plan to continue holding bonds until maturity will not be harmed by the interim price movements, and those who hold shorter term bonds in their portfolios will be well positioned to reinvest as rates creep higher. Additionally, rising interest rates will be welcomed by savers and those who are looking to cash as a respite from volatile equity markets. There are winners and losers under every scenario.
We are presently in the midst of one of the strongest earnings seasons in recent memory, but the stock market has barely budged. The lack of movement suggests that most of what we are seeing was already reflected in stock prices, and that the market is beginning to acknowledge that 2017’s huge gains left us with a much shorter climb for 2018 and beyond. Put simply, the forward outlook is quite a bit different than it was just 6-12 months ago.
A Return to “Normal”
2018 is likely to become the year of mean reversion. The Federal Reserve has made it abundantly clear that it intends to begin increasing interest rates at a steadier pace. The term that bankers use is “normalize,” and it really is a fitting term for what is going on in the economy and in the markets. Volatility in the stock market, CDs paying more than 0.5%, and a central bank balance sheet that doesn’t contain trillions of dollars of bonds are all “normal.”
After a decade of abnormal, a return to normal is going to take some getting used to.