Well, 2018’s first quarter earnings season is in the process of winding down. The first quarter of 2018 had considerably more noise with respect to earnings because of the new tax law changes. However, earnings are looking much better than expected.
During the quarter, investors celebrated the passage of the Republican tax plan that lowered the tax burden for U.S. corporations and the S&P 500 index surged almost 8% over the next few weeks. Given positive global economic news, foreign equities soared as well.
However, the markets got a little choppy upon the release of the January employment numbers. The key issue is wages are finally rising, and more quickly than anticipated. This stoked inflation fears and raised the likelihood the Fed may raise interest rates more quickly than anticipated.
Then, President Trump imposed tariffs on solar panels and washing machines. In return, China threatened to impose their own sanctions. It wasn’t until mid-quarter, when Trump imposed tariffs on Steel and Aluminum, that they returned the favor, imposing their own tariffs on 128 U.S. products. With that… game on…market volatility ratcheted up and the negative news banners ensued.
Quietly rumbling in the background to all the headline news, the Fed has started to slowly reverse its stimulus program. They are raising short-term rates and shrinking their bond portfolio. Both measures have a tightening effect on the economy and the big fear is the net effect of doing this could kill economic growth. At some point, the various global economies will also end their stimulus programs, potentially leading to the death of global economic growth as well.
When you add it all up, the tariffs and the Fed tightening, the markets got a little spooked and our much awaited 10% correction finally arrived. The net result, the S&P 500 index ended up approximately where it started … well, maybe a little south of where it started. As they say, the past is the past, the future remains uncertain. The remainder of the year may well be more volatile than what we have seen in the past few years. Of key concern is the potential for a trade war between the U.S. and China and how quickly inflation rises over the next several months.
On Thursday, May 3rd, we will conduct our quarterly Economic Update – Virtual Happy Hour. The focus of this webinar is to review the overall status of the U.S. and global economy. Whether you are a business owner or an individual investor, join us to learn about how things have gone and where we see things heading.