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Market Perspective - February 2018


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Market Perspective - February 2018

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Market Perspective - February 2018

  1. 1. Market Perspective – February 2018 Experience Insight Impact Overview: Late January and into early February saw the long awaited return of market volatility. Volatility is a normal part of healthy markets. As such, this month we look back and attempt to put the recent market movements into the proper historical perspective. 1
  2. 2. S&P 500 Volatility Re-Emerges Experience Insight Impact • For the past year, the S&P 500 has experienced no drawdowns of more than 3%, bringing this lack of volatility to historic levels. • As you can see from the chart above, markets finally saw a correction of 10% after a very sharp rally in January (denoted by the yellow bordered box). 2 Source: Bloomberg
  3. 3. Lack of Volatility Hits Records Experience Insight Impact • The chart on the right, which appeared in the 2/10/18 edition of Barron’s (and references the work of Goldman Sachs), notes the longest time frames without a 5% drop. • At 404 days, the lack of volatility was historic. 3
  4. 4. Volatility is Typical Experience Insight Impact 4 Intra-year declines are quite common and historically temporary.
  5. 5. Historical Perspective Experience Insight Impact 5 • The chart on the right identifies corrections (defined at 10% pullbacks) and bear markets (defined as 20% pullbacks) since World War II. • The dates are noted in the first column, the performance in the second, the length of the pullback in the third, and finally the time to a recovery (new highs) in the fourth column. • The power of this chart’s theme is to solidify long-term thinking and remain unemotional during difficult markets. While the media might paint the picture that this correction has been faster/sharper/different, the data suggests otherwise. • It is also important to note, depending on the length and size of the pullback, the recovery has generally been within a reasonable timeframe.
  6. 6. With the Decline Comes More Affordable Valuations Experience Insight Impact • The chart on the right (again from Barron’s), demonstrates the decline in forward P/E with the price drop in the S&P 500 Index, a common measure of valuation. • With tax reform expected to boost earnings this year (albeit somewhat artificially on a one-time basis), growth should continue. 6
  7. 7. Market Perspective – February 2018 Experience Insight Impact Conclusion: The proximate cause for a given market correction has varied over time. This current timeframe is being blamed on volatility strategies, interest rate increases and hedging structures, but the outcome is likely to be the same. A return to normally functioning markets, with price swings above and below an upwardly rising long-term trendline, is expected to reign once again. Our goal as investors, is to remain nimble in light of the constantly changing environment within the framework of meeting the long-term goals and objectives of our clients. 7
  8. 8. Disclaimer Experience Insight Impact Opinions expressed in this commentary may change as conditions warrant and is for informational purposes only. Information contained herein is not intended to be personal investment advice for any specific person for any particular purpose. We utilize information sources that we believe to be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee of future performance; investing involves risk and may result in loss of capital. Consider seeking advice from a professional before implementing any investing strategy. 8