FFSS Investment Perspective

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April 2018 Investment Perspective

To Our Clients:

Stocks struggled to post gains in April despite companies well on the way to reporting what could be a record-breaking profit quarter. The market is weighing the impact of higher interest rates and the realization that first quarter earnings may be the best for the year. For example, Caterpillar exceeded both earnings and revenue expectations and raised its full-year earnings guidance by $2 per share, yet comments by the CFO that operating margins during the first quarter would be the company’s “high water mark for the year” caused investors to sell the stock aggressively. The market continues to assess risks that were not present at year-end. Wall Street still does not know whether the U.S. and China are in the early days of a full-blown trade war. There’s also the looming specter of special counsel Robert Mueller’s investigation and the constant drumbeat of unrest in the nation’s capital. For the month, the S&P 500 index and the Dow Jones Industrial Average posted gains of 0.27% and 0.24%, respectively. The NASDAQ rose 0.04%.

The yield on the 10-year Treasury topped three percent during the month for the first time since January 2014. Rising rates are attributed to an easing in geopolitical and trade tensions, rising commodity prices and an uptick in German bond yields. Some analysts believe it is mostly a momentum trade tied to higher commodity prices. These prices rise and fall faster, caused by short-term factors that cause spikes in prices, then settle down in a more “normal” trading range. Rising inflation is a worry that could cause the Fed to raise interest rates more aggressively than thought at the beginning of the year. An additional factor is that the Treasury is expected to issue a record amount of bonds this year to fund the rising U.S. debt..

Corporations are reporting better-than-expected earnings and revenue growth. At the end of April, nearly 55 percent of the S&P 500 companies have reported first quarter 2018 results. Over 79% have reported earnings above expectations, which is above the long-term average of 64%. Over 73% of companies have reported first quarter revenue above expectations. This is above the longterm average of 60%. First quarter 2018 earnings are expected to increase 24.6% from first quarter 2017. Revenues are expected to rise 8.1% over the same period.

We remain positive on the market and continue to believe that stocks will post gains for the full year. Fidelity Investments recently completed a study analyzing daily volatility and the results show that while 2017 experienced abnormally low volatility, 2018 is on par with the 35-year average. Investors might do well to remember, writes Ken Brown at “Heard on the Street”, that risk isn't volatility, but rather the chance of a permanent loss of capital.

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