May 2018 Financial Markets Summary

Rampant Inflation!  Rising interest rates destroying bonds!  Record losses and volatility for stock markets!  These seem to be common phrases used by the media these days.  However, these statements could not be further from the truth.

Yes, we have seen a slight increase in inflation, but nowhere near levels that would cause concern or be considered rampant.  Core inflation has ticked up from 1.7% to only 2.1% in the past six months.  Headline inflation, which includes food and energy, is only around 2.4%.  Most of this uptick is due to wage growth, which is a sign of a strong economy.  The media would lead you to believe this is a negative for the economy.

Yes, interest rates are rising as the Federal Reserve continues their plan to normalize rates.  The Fed has increased their rate by 0.25% this year with the plan to increase by another 0.75% to 1% by year-end. This caused the 10-Year Treasury yield to increase from 2% up to 3% in the past eight months.  Rising rates are just another sign of a strengthening economy.  Interest rates are still below normal levels and we do not anticipate a sharp increase like the media suggests.

Yes, we have seen a stark change in volatility relative to 2017’s subdued nature.  We have already experienced 28 days in 2018 where the S&P 500 moved up or down by more than 1% compared to only 8 days in 2017.  However, this year’s volatility is closer to normal levels.  Yes, domestic stocks were down just over 10% from their January 26th highs but are now around break even for the year.

The media does an excellent job of exaggerating topics to manipulate your emotions.  The headlines discussed above could initially cause concern for investors.  But, if you peel back the onion, you realize these are not as negative as the media leads us to believe.  We feel we are entering the later stages of this bull market cycle, but that should not cause investors to panic.  Returns could be more muted in the years to come, but diversified portfolios are designed to weather these market environments.

Asset Index Category Category Category 5-Year 10-Year
3 Months 2018 YTD Average Average
S&P 500 Index – Large Companies -6.2% -1.0% 10.6% 6.7%
S&P 400 Index – Mid-Size Companies -4.2% -1.5% 10.0% 8.4%
Russell 2000 Index – Small Companies -2.1% 0.4% 10.2% 8.0%
MSCI ACWI – Global (U.S. & Intl. Stocks) -5.1% 0.0% 9.0% 5.5%
MSCI EAFE Index – Developed Intl. -4.1% 0.7% 5.9% 2.4%
MSCI EM Index – Emerging Markets -6.8% 1.0% 4.7% 2.2%
Short-Term Corporate Bonds -0.1% -0.4% 1.0% 2.3%
Multi-Sector Bonds -1.0% -2.2% 1.5% 3.6%
International Government Bonds -1.0% 2.1% 0.8% 2.0%
Bloomberg Commodity Index 0.2% 2.2% -7.3% -7.8%
Dow Jones U.S. Real Estate -2.9% -5.7% 5.2% 5.7%


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