2018 1st Quarter Update
2018 started with a bang then more bangs!
What seemed like a continuance of 2017’s tranquility in the early parts of the quarter turned into extreme volatility – that our short-term-memory has probably forgotten, can exist. Some of the major events taking place were:
· New Fed chief was formally installed, and while he did signal a continuation of Yellen’s slow upward rate adjustments, we are still uncertain if he will continue on that path.
· Trump’s latest twitter storm took on Amazon – causing some disruption in the tech sector
· Trump’s imposed tariffs, mainly against China. While the magnitude was not material – the fear of a full out trade war grew larger.
As can be seen below, equities went on quite a roller-coaster:
And as expected, rates ticked up consistently across the yield curve in the past quarter. This was both due to Fed revised expectations on tightening (market is pricing in a higher probability of tightening 4 times this year vs previously thought 3 times) and higher inflation expectations. The curve has however started to flatten a little bit, due to economic uncertainty in the longer term.
Inflation expectations for the future have however slowly been picking up, resulting consistently above 2% (which is the Fed’s long-term target).
All in all, while volatility was a relative surprise – we have become too accustomed to the tranquility of late and should expect a return to a market that does swing! The portfolio dipped slightly over Q1 caused mainly by a risk-off attitude (i.e. people selling into cash). And while we are probably at the latter part of the business cycle, we do think a continuation of growth / low inflation is the most likely path forward.