After a stellar 2017, where markets reaped handsome returns on all fronts, investors found themselves surrounded by troubling news and a tremendous amount of volatility in the first quarter of 2018. Gains made in January were wiped out by the end of the quarter. Some of the factors that appear to have contributed to the upset include fears of an all-out U.S. trade war with China,1 inflation concerns, more hawkish Federal Reserve policy and technology stock woes. Despite the rollercoaster-like ride we had, emerging-markets stocks and bonds both ended the quarter with positive returns, and the U.S. equity market was down slightly.
U.S. large-cap stocks, represented by the S&P 500 Index, concluded the quarter with a 0.8% decline. Small-cap stocks (Russell 2000 Index) performed slightly better, ending the quarter down by just 0.1%. Value stocks continued to underperform growth stocks; the Russell 1000 Value Index fell 2.8% whereas the Russell 1000 Growth Index gained 1.4%. Although pressure on value-tilted portfolios continued to mount this quarter, our investors were rewarded from having exposure to segments such as the emerging markets, which helped counter the headwinds from developed-market equities (including U.S.) during the period.
Emerging-markets stocks posted muted gains, with the MSCI Emerging Market Index up +1.4% in U.S. dollar terms (+0.7% in local currency terms). Brazil, Russia and China were among the strongest performers this quarter. A depreciating dollar relative to most major currencies helped U.S. investors in overseas markets. International-market equities (MSCI EAFE Index) underperformed U.S. equities this quarter and declined 1.5% in U.S. dollar terms (-4.3% in local currency terms). While markets around the world faced downward pressure, exposure to emerging-markets stocks helped investors mitigate some losses, further underscoring the importance of international diversification in challenging market conditions.
On the fixed-income side, the Federal Reserve raised rates in March by a quarter-point. While the rate hike was widely anticipated, there were some concerns that a more hawkish Fed policy going forward could put a damper on growth. Since the end of 2017, 2-year Treasury yields rose from 1.89% to 2.27%, and the 10-year Treasury yield rose from 2.40% to 2.74%. With rates in the intermediate-term segment of the yield curve beginning to rise, the Bloomberg Barclays Aggregate Index, representing investment-grade U.S. bonds, declined 1.5%. Municipal bonds (BBgBarc Municipal 1-10Y) also had a negative return of -0.7%.
Emerging-markets debt, as represented by the JPM GBI-EM Global Diversified Index (UH), yielded +4.4% — the strongest performance among all asset classes. A declining dollar contributed greatly to the strong return for U.S. investors in local currency EM sovereign bonds. High-yield bonds did not fare as well, with the BofAML US HY C Pay BB-B Constd Index declining 1.1%.
What a hectic first quarter! In a period of merely three months, we experienced multiple market panics caused by different macroeconomic concerns and also witnessed the market value of one of the most favored tech stocks dive. The S&P 500 Index of U.S. large-cap stocks experienced six trading days of +/- 2% moves this quarter alone, compared to no such moves in all of 2017. A quarter is just ~90 days of an investment lifetime — but when the market is bumpy, those days can feel much longer if an investor is unable to tune out the short-term noise and focus on factors within their control.
Among those factors is diversification. When your portfolio has exposure to multiple markets and asset classes, and includes thousands of stocks and bonds, though it is not immune to market declines, you can rest assured knowing you have a well-built defense against market uncertainty.
U.S. Stock Market: Russell 3000 Index
International-Developed Stocks: MSCI EAFE NR Index
Emerging-Markets Stocks: MSCI EM NR Index
U.S. Bond Market: Barclays Aggregate Index
Emerging-Markets Bonds: JPM GBI EM Global Divers TR Unhedged
Return data represent past performance and are not indicative of future results. Historical returns of indices do not reflect applicable transaction, management or other applicable fees, the incurrence of which would decrease historical performance results. Index information has been compiled by Hewins from sources Hewins deems reliable, but has not been independently verified. Historical performance results for investment indices and/or categories have been provided for general comparison purposes only. Indices are unmanaged. It is not possible to invest directly into an index. Any charts and graphs represented herein are for informational purposes only and cannot in and of themselves be used to determine which securities to purchase or sell, or when to purchase or sell securities.