To sum up the US financial markets of 2017 in one word, serene would be a top choice.  Major indices produced record after record, while displaying some of the lowest volatility in history.  Many headlines in the US and around the globe gave opportunities for investors to get out of the market, but the bait was left on the hook.  All of last year, the S&P 500 had four days of one percent or greater advances, as well as four days of one percent or greater declines.  The largest drop from a high during the year was -2.8% and the worst single day decline was -1.82% on May 17, 2017.  Average closing level of the VIX was 11.09 for the year which was the lowest annual average in the history of the ‘fear index.’

The first quarter of 2018 has been anything but calm.  Passing of the Tax Reform and Jobs Act in late December propelled the markets higher to start the year, but since the high on January 26, volatility has picked up significantly.  Already through quarter one there have been eleven days of one percent or worse losses, and thirteen days of one percent or greater gains.  The largest drop in one day was -4.1% on February 15, and the largest fall from recent highs was -10.2%.  The VIX has averaged 17.35 based on closing values, significantly above 2017 levels.

The early days of the second quarter have continued where the first quarter ended.  What could be the cause of the drastic change from 2017 to 2018 then?  You could say that the markets have returned to normal, more healthy activity.  It may be hard to think of this as normal, when 2017 was so different, but last year had the lowest drop from a high in any year since 1995, when the largest fall from highs was -2.53%.  Not to say 2018 hasn’t caused some angst in many investors, but the calm before this storm lasted so long that few remembered what a darker day felt like.

Ultimately, while recent volatility can be cause for concern it is important for long-term investors to remember the positive developments in the economy and the markets.  While the current bull run just recently turned nine, the second longest for the S&P 500, the saying goes that bull markets don’t die of old age.  Global synchronous growth has continued into the new year.  US GDP has continued its growth and US corporate earnings continue to impress.  On top of the earnings, revenue growth has been even more of a positive for these companies.

A bull market ends when a drop of 20% or more from the highs occurs.  Since 1990, there have been two ends to bull markets, both of which coincided with an US economic recession.  Many indications show that a recession is not in our near future.  Headlines could continue to create volatility for the markets, especially those of a looming trade war.  Earnings season starts rolling in the middle of March which should alleviate the focus on headline risk and put the emphasis back on the corporate data.  With anticipation for continued growth, there is likely an end to this storm soon.

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Should the fundamental picture change it will be necessary to review our strategy and allocation.  Currently, estimates for first quarter are 7.2% revenue growth and 17.8% earnings growth year-over-year, according to Zacks Investment Research Inc.[1]  These growth numbers follow last quarters results that were the best in 6 years.  GDP growth is expected to be over 2% for the fourth quarter in a row.  Unemployment remains low and consumer confidence is high.  These indicators give us reason to remain optimistic about current valuations.

[1]https://www.zacks.com/commentary/153833/q1-earnings-season-to-show-growth-acceleration

The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results. An investor cannot invest directly in an index.