In the first quarter of 2018, volatility returned to the markets after two years of relative calm. Though the economy is on strong footing, indexes for the quarter returned mixed results. For the quarter, the S&P 500 decreased -.8% and the FTSE All World Ex-Us Index declined -1.31%. Investors watched as technology company troubles, tariffs, potential trade wars and inflation concerns dominated the headlines. Going forward, we expect GDP growth to accelerate in the short term, unemployment to decrease, interest rates to rise and inflation to increase slightly as the Tax Cuts and Jobs Act of 2017 continues to take effect.
Capital Markets Review
January 1, 2018 – March 31, 2018 index returns:
S&P 500 (U.S. Large Cap): -.8%
Russell 2000 (U.S. Small Cap): -.1%
MSCI EAFE (Developed International Markets): -1.4%
MSCI EME (Emerging Markets): 1.5%
Barclays Capital Aggregate (U.S. Fixed Income): -1.5%
Barclays Global High Yield Index: -.4%
Bloomberg Commodity Index: -.4%
The U.S. economy is in its 10th year of a bull market. In the fourth quarter of 2017, GDP increased at an annual rate of 2.9%, according to the third estimate released by the Bureau of Economic Analysis. Total nonfarm payroll employment increased by 103,000 in March, and the unemployment rate was unchanged at 4.1%, according to the U.S. Bureau of Labor Statistics.
The small fall in the ISM non-manufacturing index to 58.8 in March, from 59.5, leaves it close to a 13-year high and suggests that the slowdown in GDP growth in the first quarter was temporary. We believe the Federal Reserve, with new Fed Chair Jerome Powell, will likely raise rates a few times in 2018 as the global economy continues to improve. The yield on the 10-year U.S. Treasury rose in 2018, and we expect it to rise more in 2018 – to perhaps 3.0% or higher – as inflation picks up.
The U.S. dollar is down, which can be attributed to the widening U.S. budget and deficit, and a decline in the U.S. dollar as an international reserve currency. Escalating trade tensions, kicked off by Trump’s decision to impose tariffs on steel and aluminum imports, could affect willingness of America’s trade partners to hold USD assets.
Globally, growth and manufacturing is strong. In the eurozone, GDP growth and earnings are solid. Consumer confidence is strong, credit growth is rising and corporate earnings are supported by revenue growth and margins. International equities have continued to perform well, and we believe there is still opportunity in this area. As mentioned in prior communications, we increased international exposure in 2015, and our portfolios have benefited.
In the Asia Pacific region, we believe there will be solid growth and low inflation in 2018. The risk of a slowdown in China remains, yet the Chinese government has a GDP growth target of 6.5% in 2018. In Japan, there is positive consumer and investment outlook and consumption spending.
Volatility and Our View
We expect the U.S. economy in 2018 to benefit from the Tax Cuts and Jobs Act of 2017, but the benefits could be short-term. Eventually, we feel that the increases in our federal deficit resulting from the tax cuts and increased spending will hinder growth in future years. The Congressional Budget Office expects the deficit to grow to $1 trillion by 2010.
Though uncomfortable for everyone, volatility is normal – even the volatility we saw in the first quarter. We don’t expect the markets to return to their historic calm in 2017. Dips in the market can’t be predicted, yet they can be expected. Instead of reacting emotionally, investors can work with their advisor to stick to a financial plan and goals, and ride out the volatility. Timing the market can be a dangerous habit, and very hard to do. Though markets can have bad days, weeks, months or years, investors are less likely to suffer losses over longer periods. The financial markets have rewarded long-term, globally diversified investors.
We continue to monitor the global economy and seek opportunities to invest in certain sectors and geographic regions given the current market environment. In our view, a long-term investment horizon, asset allocation, diversification and discipline remain crucial to portfolio success. If you are a client and would like further detail on these topics or anything else, please call or email us. If you are not a client, but would like more information on Callan Capital’s wealth management services, please contact us at (858) 551-3800 or www.callancapital.com.
 2018 Global Market Outlook, Russell Investments. Q2, 2018.
 2018 Global Market Outlook, Russell Investments. Q2, 2018.
Data are as of April 11, 2018
Past performance does not guarantee future results.
Diversification does not guarantee investment returns and does not eliminate the risk of loss.
The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 Index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. An investor cannot invest directly in an index. Indexes are unmanaged.
The FTSE All-World ex US Index is one of a number of indexes designed to help investors benchmark their international investments. The index comprises Large and Mid cap stocks providing coverage of Developed and Emerging Markets excluding the US. The index is derived from the FTSE Global Equity Index Series (GEIS), which covers 98% of the world’s investable market capitalization.
Russell 2000 Index: An index measuring the performance approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States.
EAFE Index: An index created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in international index has been in existence for more than 30 years.
EME Index: An index created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in global emerging markets. It is a float-adjusted market capitalization index that consists of indices in 21 emerging economies.
Barclays Capital Aggregate Bond Index: An index maintained by Barclays Capital, which took over the index business of the now defunct Lehman Brothers, and is often used to represent investment grade bonds being traded in United States. It is an unmanaged index considered representative of fixed-rate, noninvestment-grade debt of companies in the US, developed markets and emerging markets.
The Bloomberg Barclays Global High Yield Index: The Bloomberg Barclays Global High Yield Index is a multi-currency flagship measure of the global high yield debt market. The index represents the union of the US High Yield, the Pan-European High Yield, and Emerging Markets (EM) Hard Currency High Yield Indices. The high yield and emerging markets sub-components are mutually exclusive.
Bloomberg Commodity Index: A broadly diversified commodity price index distributed by Bloomberg Indexes. It tracks prices of futures contracts on physical commodities on the commodity markets. The index is designed to minimize concentration in any one commodity or sector. It currently has 22 commodity futures in seven sectors.
Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.
For more information regarding Callan Capital, please refer to our most recent Form ADV Part 2A which may be found at adviserinfo.sec.gov.
Callan Capital does not provide individual tax or legal advice, nor does it provide financing services. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. Callan Capital outsources to lending and financial institutions that directly provide our clients with, securities based financing, residential and commercial financing and cash management services.
The views expressed are those of Callan Capital, LLC. They are subject to change at any time.