Capital Markets Review & Commentary

February marked the end of a 15-month winning streak for the S&P 500. At the end of a long, prosperous roll at a craps table in Vegas, it is traditional to applaud the shooter. The investing world tends to be more forward-looking, so the streak received little fanfare. But it was truly impressive, stretching back to before the 2016 election and finishing as by far the longest such streak on record.

Stocks began February with a sharp 10% drop. It was hard to pinpoint one specific culprit for the abrupt end to the market’s goldilocks phase. Initially, stronger-than-expected economic data (usually a positive for stock prices) stoked fears of higher interest rates or inflation. Market losses accelerated when a number of similarly positioned hedge and quant funds were forced to cover positions betting on continued low volatility. Not surprisingly, the market bounced back from this temporary pressure, but still finished the month in the red.

Capital markets remain choppy, oscillating between fears of Fed rate hikes/protectionist policy and solid underlying economic fundamentals/earnings growth. President Trump’s proposed steel and aluminum tariffs and the departure of economic advisor Gary Cohn make for great headlines of trade wars to come. Maybe. But Trump takes pride in his negotiating skills and it is difficult to differentiate between what is real and what is positioning. China does abuse intellectual property rights and actively blocks many U.S. technology firms from operating there, so some response is appropriate. Neither side wants a trade war, but only time will tell if the process can be managed harmoniously.

Our Take

The return of volatility can feel jarring after two years of hibernation. But ups and downs in equity investing are normal and healthy. Without short-term risk, critical long-term wealth creation from stocks would not be possible. Like a casino, trying to time the short-term gyrations generally only works out well for the house. But unlike a casino, the expected long-term returns from investing are positive.