Chartwell Reviews

  Volatility came roaring back in the fourth quarter, and investors were reminded that volatility has two sides – positive and negative.   Global equities sold-off sharply, with the S&P 500 index declining nearly 20% between its September 20th peak and December 24th trough.  It is the first annual decline for the S&P 500’s since 2008 and since 2015 for international equities.   Bond markets were dominated by two themes in 4Q – falling treasury bond yields and rising credit spreads.  The first pulled high quality segments of the bond market out of the red for the year, while rising credit spreads pulled credit bonds (particularly high yield and leveraged loans) into negative territory for the year.  Since Christmas, global equity markets and credit bonds have rebounded.  Is it a sustainable recovery or a dead cat bounce?  Our Review explores the causes of the sell-off and reasons for and against a market recovery.  

The quarter was a strong one for US equity investors, and not really much else.  Interest rates rose, resulting in enough capital depreciation to flatten out nearly all bond returns.  It certainly looks like we are at peak earnings growth for this cycle – the bottom of the 9th inning for the stock market or are we in extra innings?  There appears to be more downside risk in investment markets than upside potential; see our Back Page Perspectives for more on that issue.   Rather than swinging for the fences, we think it is a good time to reduce risk exposures and increase liquidity – not completely collapse risk assets, but being at the conservative end of policy ranges.

In the first quarter Review, we commented on the potential impacts that the Tax Bill might have on investment markets.  In the second quarter, the impact of taxes gave way to the impact tariffs and a potential trade war might have.  Within fixed income markets, there is much discussion (and angst) over the narrow spread between the 2YR, 10YR and 30YR bond yields and the impact a flattening yield curve becoming inverted might have on markets.  See our Back Page Perspectives on page 6 of this Review for more on this topic.

Early 2018 market returns were feast or famine as: a for-the records- January was followed by a market sell-off in February (and our first correction since February of 2016), ending with a dismal March.  In fixed income markets, there was very little black ink to be found:  leveraged loans in the US, unhedged non-US bonds and local currency emerging market bonds posted positive results.  In short, volatility returned with a vengeance. 

2017 – a “black ink” year across all asset classes; with global equities posting strong double-digit returns.  It was inevitable that many market watchers would begin drawing comparisons to 1999’s equity markets . . . and  if they would end in similar fashion.   In addition to our usual economic and market recap, the fourth quarter Chartwell Review will cover some of the similarities and differences between 1999 and 2017 equity markets.