1Q 2018 Market Summary
Equity markets experienced significant volatility during 1Q 2018. The S&P 500 Index posted a relatively modest decline of -0.76% during the quarter. The decline represented the Index’s first quarterly loss since 3Q 2015 — an unusually long streak. The slight decline does not reflect the considerable increase in volatility experienced throughout the quarter. U.S. equity markets started the year strong with the S&P 500 rising 5.7% in January, but then declined 7.7% from the market peak set on January 26, 2018 through the quarter-end. It is worth noting that despite declining in 1Q, the S&P 500 returned 14% over the trailing 12-month period ending March 31, 2018.
Several factors drove equity markets lower during the quarter, including geopolitical concerns, uncertainty around potential tariffs, rising interest rates, and company-specific concerns at top technology companies. Consumer discretionary and technology companies were the top performing sectors despite company-specific volatility, while consumer staples, energy, and basic materials were laggards. At the strategy level, growth-oriented investments continue to outperform value, as the Russell 1000 Growth Index returned a positive 1.4% for the quarter, compared to a 2.8% decline for the Russell 1000 Value. The Russell 2000 Index, which tracks small-capitalization companies, outperformed the S&P 500 during 1Q by declining only 0.1%.
Non-U.S. stocks were a mixed bag during 1Q. The MSCI EAFE Index, which tracks foreign developed markets, declined 1.5%, but the MSCI Emerging Market Index posted a gain of 1.4%. Both of these non-U.S. markets have underperformed the S&P 500 considerably over a longer-term time frame, with the S&P 500 returning an annualized 9.5% over the trailing 10-year period ending March 31, 2018, compared to 2.7% and 3.0% for the MSCI EAFE and MSCI Emerging Markets Indexes, respectively.
The Federal Reserve raised its key Federal Funds rate in March by 0.25% to 1.75% from 1.50%. This move pushed rates higher across the maturity spectrum, however the yield curve continued to flatten as short-term rates rose more than long-term rates. One-year Treasury rates rose from 1.73% to 2.08% at the end of the quarter, while 10-year rates rose from 2.41% to 2.74%. Long-term 30-year rates rose from 2.74% to 2.97%.
Bond markets reacted negatively to rising rates. The Bloomberg Barclays U.S. Aggregate Bond Index declined 1.5% during 1Q, marking a rare market environment where both stocks and bonds declined in the same quarter. High yield bonds also declined due to rising rates and concerns around growing debt levels. Bank loans were one of the only fixed income sectors to post gains, as the S&P/LSTA Leveraged Loan Index rose 1.5% as investors were attracted to the floating rate nature of bank loans. Municipal bonds were not immune to rising rates either. The Bloomberg Barclays Municipal Index declined 1.1% during the quarter.
Commodity investments were mixed. Although energy-related stocks declined, oil prices actually rose during 1Q from just over $60 per barrel to $65 per barrel. At the same time, the price of gold, as measured by the LBMA Gold Price Index, rose 2.5%.