February 2018 Market Commentary

It would seem that 2018 is off to an interesting start.  After a very positive and strong January for the S&P 5001, February came and gave much (but not all) of it back.  As of 2/22/2018, the index is still up Year To Date by approx 1.3% (FastTrack Data).  Our focus remains on the Large Cap Growth side of the market, where the YTD return is up by just over twice that of the index.

What really has our attention, though, is the Bond Market.  The Aggregate Bond Index (AGG) is down -2.18% so far this year (FastTrack Data as of 2/26/2018).  Bond investments are often mistakenly referred to as the “safe” money in a portfolio, yet the current risks in the Bond market appear to be potentially greater than those in the stock market.  And we haven’t seen that in quite a while.

The last bear market in bonds appears to be from the early 1940s through 1982 (see Shiller link below).  The value of a bond tends to fall as interest rates rise.  If interest rates continue to rise, that could be a big headwind for the price of bonds.  You can see a great long-term chart of the 10 Year Treasury Bond interest rates on Rober Shiller’s page HERE.

The positive part of this story, especially if you’ve been following our commentary for a while, is that we’ve been well ahead of this potential Bond bear market and have been working to keep the more conservative side of our investments less volatile:  we’ve been shortening durations and in some cases even replacing Bond Funds with Money Market funds to help keep the perceived risks lower.

Three Year chart of the AGG (Aggregate Bond Index ETF) vs BIL (1-3 Month Treasury Bill Index ETF) with 5 and 55 Day Moving Averages – StockCharts.com

At this point, we are only just over half-way through the 1st Quarter of 2018.  Much can still happen that could have us moving to be more defensive in the second quarter of this year.  But for now, there remain many pockets of strength that aren’t being as negatively affected by the current volatility.  For example, the areas of Consumer Discretionary, IT Services, Financials, and Aeropace and Defense are holding up relatively well (FastTrack Data).

For the most part, this earnings season has again been positive and there seems to be little justification for the recent stock market volatility.  That being said, the market does what it does.  At this point, we don’t believe the economy is at the point of a major, prolonged correction…yet.  And while we may even be overdue for the next recession (as these are cyclical events), we don’t believe we’ve seen the euphoria that often comes at the end of bull markets.

This current bull market is now the 2nd longest (by calendar-day count) in history, and it doesn’t show signs of quitting just yet.  Rather than trying to predict when that time may come, we’ll keep to our plan and know what to do when it gets here.


1 The Standard and Poor’s 500 is an unmanaged, capitalization weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.