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Flat out of the gates. The second quarter starts with a thud. | 04.02.18



Following the first negative quarter for domestic stocks since 2015, the second quarter of 2018 began on a sour note, with the S&P 500 Index falling 2.2 percent and the technology-heavy NASDAQ dropping 2.7 percent today. Consumer discretionary stocks were also notably weak performers while international stocks fared only slightly better than their domestic brethren. For their part, bonds offered small compensation for diversified investors, with U.S. Treasuries increasing only modestly in price. Oil prices fell 3.2 percent while gold was a relative winner, reflective of the broad sell-off across capital markets.

While difficult to parse specifically what caused today’s sell-off, we see the moves as consistent with the changing balance between risk and reward that we’ve been chronicling in recent missives, including our quarterly outlook piece and other market views published in previous weeks. We are coming out of a period where investors enjoyed synchronized global economic growth, healthy corporate profits and domestic policies that market participants have interpreted as being stimulative, at least in the short run. Although corporate profits and economic growth appear to have some momentum, policy uncertainty has contributed to recent investor concerns in the form of central banks becoming more restrictive, major economic players like the United States and China becoming more inwardly focused, and uncertainty about increased regulation at the sector or individual company level.

Today, the U.S. stock market closed below what some investors consider to be a key level — the 200-day moving average. This measures what it sounds like, which is the rolling average closing price level for the past 200 days. The U.S. equity market (as measured by the S&P 500) had breached this level during the trading day on February 9, 2018, but then ended up closing above that level at the end of the day. Today, the S&P 500 attempted to rally back to surpass the 200-day moving average level after being below it by over 1 percent, but was unable to do so.

We do not base our investment process or views solely on shorter-term market indicators or events, but we do want to keep you informed of our thinking. While we believe that markets may endure some more volatility in the near term, the optimism/pessimism pendulum sometimes swings too far in both directions. We feel the current media coverage of this most recent bout of volatility across asset classes may conjure up more negative thoughts than necessary. For example, while the S&P 500 is down more than 10 percent from its late January 2018 highs, it is only down marginally on a year-to-date standpoint. Further, our own research shows that over the past 20 years, stocks have averaged about a 14 percent intra-year decline, including some years where stocks experienced double-digit gains. We have also seen a lot of focus on the fact that last quarter was only the eighth quarter in the past thirty years where both bonds and the S&P 500 declined in value, but both were only down marginally.

The next few weeks will provide us with a lot of insight into corporate earnings and outlooks for the rest of 2018 and beyond. Further, we continue to monitor hundreds of global data points across sectors, providing us with insights into the “real” economy. While we see some challenges and the potential for policy risks to continue to develop, we are encouraged by ongoing economic growth and the potential opportunities ahead. In a year when investors are trying to anticipate policy changes, determine where interest rates may settle and assess other important market drivers, asset classes are likely to oscillate. Our shared focus continues to be on your goals and the tools it will take to work towards them. If we can help answer any specific questions you have about what the current capital market environment may mean for you, please do not hesitate to let us know.

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This information represents the opinion of U.S. Bank Wealth Management. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. Any organizations mentioned in this commentary are not affiliated or associated with U.S. Bank in any way.

Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.

Past performance is no guarantee of future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Indexes mentioned are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The NASDAQ Composite Index is a market-capitalization weighted average of roughly 5,000 stocks that are electronically traded in the NASDAQ market.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible difference in financial standards and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. Investing in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. Investment in debt securities typically decrease in value when interest rates rise. The risk is usually greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities.


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