Despite losses in the last few days of January, equities had strong gains for the month, with the Dow Jones Industrial Average (Dow), Standard & Poors 500 (S & P 500) and Nasdaq up about 8.1%, 5.6%, and 7.3%, respectively. Small cap stocks were up about 2.6% for the month, based on the Russell 2000 index and International equities were up about 5.4% for the month based on the Dow Jones Global index, ex-U.S.
Interest rates, as measured by the ten-year Treasury yield, moved up significantly from 2.42%, to 2.69% at the end of January. Globally, rates are relatively low, though inflation in Japan and a potential rate increase by the European Central Bank have been putting upward pressure on U.S. rates. The Federal Reserve Board (Fed) is also expected to increase short-term rates during 2018. The transition from Fed Chairman Janet Yellen to Jerome Powell seems to be going smoothly with the new Chair expected to continue on the same path of rising rates.
The environment for equities remains positive with synchronized global growth, low interest rates, and strong corporate balance sheets. Corporate earnings have also been beating expectations, with many analysts forecasting double digit growth for fourth quarter earnings, compared to the previous year. Additional tailwinds may come from tax reform, which could add to both corporate earnings and Gross Domestic Product (GDP).
Still, investors should be prepared for volatility and a possible correction. These kinds of bumps are normal, and could be caused by any number of factors, including (but not limited to) disruptive trade policies, geopolitical concerns, and rising interest rates.
While no one can predict the market, most agree that the fundamentals look good and expect a positive year for the stock market. Some expect a short-term pullback during the year, but then a recovery by year-end.
Based on strong recent market performance, investors should reassess their allocations to ensure that they are consistent with their risk objectives. We have done this for our clients and will continue to review this throughout the year. Clients should also be wary of tax ramifications of any allocation changes, some of which may be unavoidable in 2018 based on significant deferred growth they have achieved on their existing holdings.