Question

Level II: a) Write a summary of US stock market in 2018, include S&P 500 index return, key issues facing the market and economy and major events from the Fed.

Answer 1

Answer

US stock market summary 2018

it has been a long time coming, but for the first time in nine calendar quarters, most of the major stock and bond indexes were down. So far we have only seen modest declines for the year but it does remind us that yes, markets can and do go down from time to time. It also reinforces what we have been telling clients for the last several months, that 2018 was likely to be a lot choppier than 2017, because 2017 was an abnormally calm year. Years like 2017 that have only brief rough patches do not come around very often.

Even though the stock markets have dropped about 10% from their highs in late January, most stock indexes are only down modestly for the year. Going back to 1980, a period of 38 years, the S&P 500 had an intra-year drop of at least 10% in 22 of those 38 years. In 14 of those 22 years with a greater than 10% drop the S&P finished with a positive return on the year. Also, of note, that the S&P has been positive in 29 of these total 38 years since 1980.

the only major asset classes that escaped the first quarter of 2018 with a green (positive) return for the quarter were Emerging Markets stocks (represented by VWO-Vanguard FTSE Emerging Markets), Commodities (DBC-PowerShares Commodity Tracking ETF) and short-term bonds (MINT-Pimco Enhanced Short Maturity Active ETF).

Emerging Markets have been a laggard for the last 10 years, but in the last year and a half are really coming on strong as many of these economies are really starting to hit on all cylinders as the world economy continues to improve. Commodities have also been abysmal for most of the last 10 years, but with some signs of inflation appearing they have started to perform better (Commodities generally do well when inflation picks up).

Short-term bonds were able to manage some modest gains, as bonds with very short maturities will usually do better than bonds that have longer maturities when interest rates rise like they have for the last several months. As interest rates go up, bond prices generally fall and when interest rates fall, bond prices rise. the start of 2018 the 10 year Treasury Rate (blue) has risen from 2.46% to 2.74% and was as high as 2.94% in February. The 5 Year Treasury (red) has gone from 2.25% to 2.56% and the 2 Year Treasury (orange) has gone from 1.92% to 2.27%.

e Dow Jones Industrial Average (DIA-SPDR Dow Jones Industrial Average) which is the index you hear about the most on the news and in conversations was the next worst performer, losing about 1.7%. The Dow underperformed most of the other indexes as companies like General Electric (GE), Exxon Mobil (XOM) and Procter & Gamble (PG) which are large components of the Dow, really struggled. Remember, the Dow Jones Industrial Average only consists of 30 stocks and is not a good gauge of the overall stock market because of the limited amount of companies in this index. The S & P 500 with 500 stocks or the Russell 1000 with 1,000 stocks are better barometers of how the U.S. stock market is behaving..

Key issues faces the stock market

Major indexes have repeatedly swung across the break-even level for the year

The line in the sand for stocks? The S&P 500 has frequently moved between positive and negative territory for the year in 2018 2,900 2,850 2,800 2,750 2,700 2,650 2,600 2,550 +7.5% 2018 closing high 2017 close -3.5% 2018 closing low Mar Apr May Source: MarketWatch Jan Feb

Wall Street has been mostly running around in circles so far in 2018.

U.S. equity markets have been extremely volatile in 2018, with massive swings in both directions on a near-daily basis. Investors have weighed supportive economic data and corporate earnings on one hand against the prospect of resurgent inflation, trade-policy uncertainty, and other geopolitical issues on the other. The Dow Jones Industrial Average DJIA, +0.02%  and the S&P 500 index SPX, +0.27%  have recently shown signs of strength, but they’ve also wallowed in correction territory—defined as a drop of 10% from a peak without a gain of 10% from that bottom—for the longest stretch since the financial crisis.

What’s the result of all these gyrations? Basically nothing.

More than five months into 2018, Wall Street has made essentially no progress over where it ended 2017, with major indexes holding at roughly break-even levels for the year. The Dow is down 0.05% year to date, as of Tuesday’s close, while the S&P is up 1.4%. The Nasdaq Composite Index COMP, +0.21%  powered by outperformance in large capitalization technology and internet stocks, is up 6.5%.

The year-to-date standing belies the degree by which the market has been whipsawed. The Dow has gained as much as 7.7% over where 2017 ended, based on its closing high for the year, and it has dropped as much as 4.8%. The S&P has traded in a range of gaining 7.5% and falling 3.5%.

“Markets seem eager enough to buy back their book at year-end 2017 levels, but are less certain about any other price. More than four months of news flow and U.S. stocks are essentially unchanged on the year,” wrote Nicholas Colas, co-founder of DataTrek Research. He added that earlier this week, the S&P crossed the break-even point for the year for an eighth time in 2018.

That stocks have been stuck in a range marked by the S&P’s record and its correction low has been long noted by investors. While recent trading has been to the upside—the Dow could post its seventh straight daily gain on Friday—the range speaks to the level of uncertainty there is over what the market’s next move could be.