What a difference a new year makes. Just when investors might have been lulled into the notion that a low-volatility and upward-trending environment was here to stay, the stock market shifted gears in early 2018, jolting participants back to reality.
By the end of May, the S&P 500 produced a total return of 2% for the year, a fairly anemic number compared to the 8% we saw by the end of May last year. Lest we think we’ve been experiencing a sleeping market, we’re reminded of the volatility that greeted us right out of the gate: The S&P 500 with dividends gained over 5% in January but fell over 3% in February and another 2.5% in March, leaving investors right back at square one by the end of the first quarter.
As we’ve mentioned in previous market updates, the S&P 500 has been trading in a range between the high reached in late January and the low we saw in early February. That correction represented a 10% drop, the largest we had seen in quite a while, leaving investors to wonder whether it was the beginning of a deeper slide. Although stocks recovered somewhat in April, they have remained within the confines of that January-to-February range, albeit not without periods of increased volatility.
Until the stock market breaks out of that range, we wait. For what, you might ask? A break above the January high would be perceived as a bullish sign, in which case we would add to our equity exposure. However, a break below the February low would be considered a bearish move, and we would raise cash levels. As of the end of May, our portfolios were positioned somewhere in the middle, ready to take advantage of either scenario:
While we wait for the broader stock market to confirm a bullish or bearish stance, we keep an eye out for opportunities in pockets of strength beneath the surface. Two such areas that have been stronger than the broad market since March are small cap stocks and commodities, and we have exposure to both in several strategies. Small caps were particularly strong in the month of May, helped by a solid U.S. economy and a move away from multinational companies facing geopolitical concerns.
Growth stocks, most notably in the technology sector, have also been favored over value stocks this year, and our equity-oriented portfolios continue to maintain a growth bias.
What about the bond market? Looking for pockets of strength also holds true on the fixed income side. While the broader U.S. bond market has been struggling, down 1.5% for the year through the end of May, our conservative strategies maintain exposure to areas that have been holding up better. These areas include floating rate, high yield, and municipal bond funds.
Even though markets may stay range-bound, broadly speaking, there are usually smaller segments within those markets that reflect better relative strength and provide opportunities for active investing. Navigating the waiting game can be better spent identifying those pockets of relative outperformance.
Mary Ann Drucker
Assistant Portfolio Manager
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