First Quarter 2018 Update

April 27, 2018

Key Points

• The global economic environment continues to benefit from a rebound in demand and generally accommodative monetary policies.
• Economists expect as many as three additional Fed rate increases in 2018 as inflation picks up and wage pressures accelerate.
• The negative quarterly return was only the second in the S&P 500 Index’s past five years
• Most analysts expect the volatility that has defined the market so far this year to continue throughout the year.

The Global Economy

The US economy continued on its upward trajectory, with overall growth and employment posting solid gains. The Bureau of Economic Analysis reported its third estimate of fourth quarter 2017 gross domestic product (GDP) of 2.9%, up slightly from the prior estimate, but somewhat lower than the third quarter’s 3.2% reading. The employment situation also made gains, with an average of approximately 242,000 jobs added each month. At the same time, the unemployment rate remained steady at 4.1%. The Federal Open Market Committee (FOMC) modified its interest rate policy by raising the federal funds rate target 25 basis points to a range of 1.50% to 1.75%. Economists expect as many as three additional increases in 2018 as inflation picks up and wage pressures accelerate.

The global economic environment continues to benefit from a rebound in demand and generally accommodative monetary policies. The Eurozone economy grew at a 2.7% annual rate in the fourth quarter, well above trend. Growth in the region has been driven by ultra-accommodative monetary policy, a firming labor market, and robust domestic demand. China continued its strong growth from 2017, and experienced its first year-over-year acceleration since 2010. The country’s 6.8% fourth quarter annualized GDP growth was higher than the 6.5% target, even as policymakers are implementing deleveraging designed to limit debt-driven growth. However, economists believe that the focus on deleveraging will inhibit China’s growth somewhat in 2018.

Below, we’ve highlighted broader market returns for the 1st quarter and year-to-date time periods:

Source: Thomson Reuters, Envestnet

Fixed Income

Fixed income securities’ prices and yields were affected by a variety of factors, including the FOMC’s decision to raise short-term interest rates once again at its recent March meeting; the Trump administration’s new tariff policies on aluminum and steel imports; solid improvement in economic data; and volatility in stock prices. The administration’s new tariffs on certain imported goods were a fulfillment of one of President Trump’s campaign promises, but created concern among analysts that the gains from the recently enacted tax reform package would be undone. The economy continues to post strong gains, and the FOMC is likely to become increasing hawkish under new Federal Reserve (Fed) Chairman Jay Powell. The FOMC expects to raise short-term rates at least three more times in 2018.

Equities

Equity markets began the year on a strong note, rising 5.7% in January, but encountered volatility in February, from which it never fully recovered. The volatility and pullback were not unexpected, as broad indices had generated consistent gains in a low-volatility environment throughout 2017, and were overdue for profit-taking. In addition, the Trump administration’s tariff announcement added a reason for volatility. Against this backdrop, the S&P 500 Index finished the quarter with a loss of 0.8%. The negative quarterly return was only the second in the S&P 500 Index’s past five years. International stocks performed well on an absolute basis, but generally lagged behind US equities. As in the prior quarter, European economies continue to accelerate, as domestic demand has picked up and monetary policy has remained extremely accommodative.

Summary

The US economy is strong, and according to the consensus of economists, is primed to get even stronger. The tax cuts enacted in December—which amount to $1.5 trillion over 10 years—are only now beginning to flow through the economy, and the recent omnibus spending bill will add even more stimulus that will be felt over the next few months. Economists expect this stimulus to result in GDP growth of more than 3% this summer, job growth of 200,000 per month, and an unemployment rate declining to near 3%. Although welcome, such growth historically has not been sustainable for very long.

The Trump administration’s imposition of large tariffs on steel and aluminum imports also may have lingering effects on growth in the coming years. Many economists believe that the tariffs themselves may not have a significant impact, but to the extent they spur a broader trade war, growth could be adversely affected. In addition, the tariffs are a fulfillment of President Trump’s generally anti-trade campaign promise, which may eventually lead to slow growth.

Overall, however, the economy is still growing at an accelerated rate, and is likely to do so for the next several quarters. The risks to the positive economic outlook continue to include the potential for monetary policy missteps by the Fed, specifically, allowing inflation to rise too rapidly. Most analysts also expect the volatility that has defined the market so far this year to continue throughout the year.

Information provided is for informational purposes only and should not be construed as investment advice. The views expressed are current only as of the publication date, are based on information that St. Clair Advisors believes to be accurate, and subject to change without notice. All investment decisions must be evaluated as to whether they are consistent with your investment objectives, risk tolerance and financial situation. St. Clair disclaims any liability for any direct or incidental loss incurred by applying any of the information in this publication. Indexes are unmanaged and one cannot invest directly in an index. Past performance is no guarantee of future results.

St. Clair Advisors
6120 Parkland Blvd. Suite 306
Mayfield Heights, OH  44124
TEL: 216.925.5670 | FAX: 440.646.1838
www.saintclairadvisors.com