February's Wild Ride

At the same time, the 10-year Treasury yield rose to a high of 2.94%, and investors became concerned over the potential pace of wage growth, its impact on inflation and interest rates, and in turn its influence on future monetary policy. The concern was that rising inflationary pressures could cause the Federal Reserve to tighten too quickly, and potentially upset the favorable economic conditions we have been experiencing. Some of this concern should be alleviated by the strong fourth quarter earnings we’ve seen. The Tax Cut and Jobs Act, a strong global economy, and a weaker U.S. dollar are additional tailwinds for equities, according to Raymond James Chief Investment Strategist Jeff Saut.

The pullback was the first real test of investors’ resolve in recent memory, although long-term investors have experienced corrections more regularly in the past. In fact, the broad market S&P 500 Index has experienced a pullback of 15% on average each year since 1980, according to Senior Equity Portfolio Analyst Joey Madere. Volatility is likely to return to more normal levels this year, he added.

“One would expect either some kind of pause, or even better, some kind of pullback to rebuild the stock market’s internal energy,” Saut explained. “Plainly, the fundamentals remain excellent with earnings estimates continuing to ratchet up, revenues trending higher and a stronger economy. And while interest rates have increased, they have done so in a very orderly fashion.”

After very strong gains in January, the major equity indices slipped during February, although they remain in positive territory year to date. The S&P 500 was down 3.89% for February and The Dow Jones Industrial Average lost 4.28%. As noted in Saut’s report dated March 1^st, 2018 February represented the first negative month for the S&P 500 since October 2016. We enjoyed a great run during that time and one negative month does not represent a change in the status of the bull-market – just a pause.

Below are the asset-allocated Dow Jones Target Risk Index returns year-to-date as well as the returns for select widely followed individual equity and fixed income indices.

Returns as of 2/28/18

Returns provided by Morningstar as of 2/28/18.

Performance reflects price returns as of 4:30 EDT on Feb. 28, 2018. The EAFE reflects the previous day's close.

Our Senior Research Associate Andrew Adams holds the view, as do many other professionals, that the weakness in February was more of an overdue trading event, rather than concern about the health of the secular bull market, so his team remains constructive on U.S. stocks even with heightened volatility.

International equity markets also were volatile in February but most markets were off their 2018 lows by the end of the month, assisted by a generally solid corporate earnings season.

In the fixed income markets there are several factors simultaneously pushing and pulling on interest rates, potentially offsetting a significant directional move. The Tax Cuts and Jobs Act looks to free capital for corporations, lower price-to-earnings ratios and potentially increase revenues, all with the potential to promote future economic growth. Global central banks continue to purchase bonds in the open market yet proclaim a soon-to-be reduction. At the same time the Fed is reducing its balance sheet and positioning to raise domestic rates at least a couple of more times this year. If these events continue to clash, interest rate movement may be dulled.

Bottom line

• Inflation and interest rates remain low from a historical standpoint but are likely to move higher over the course of the year, potentially causing additional bouts of volatility.
• Given the strong economic and earnings backdrop, pullbacks should be normal in nature and viewed opportunistically.
• In the meantime, a well-diversified portfolio geared toward achieving your long-term goals should allow you to participate in upside potential as well as serve as a ballast for any short-term volatility that may arise in the coming months.

As noted by on February 23rd by Linda Duessel, Senior Equity Strategist with Federated Investors, “The rebound off the Feb. 8 bottom was so quick and strong that many investors believe the correction process might be complete; however, history suggests that after a panic sell-off, a multi-month trading range materialize”. Our experience leads us to agree that it would make sense for the market to trade within a range for a period of time before climbing to new highs.

Please let us know if you have any questions about current market events or if anything has changed that necessitates us reviewing your investment allocations. Should anything change materially regarding market or economic expectations that could affect your long-term financial plan, we will be in touch with you. Thank you for your trust in us.

Sincerely,

Eric W. Hilliard

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Branch Manager

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Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates, Inc., and are subject to change. Past performance is not an indication of future results and there is no assurance that any of the forecasts mentioned will occur.

DJ GLB Aggressive Index - The DJ GLB Aggressive is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Aggressive index is 100% of All Stock Portfolio Risk.

DJ GLB Conservative Index - The DJ GLB Conservative is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Conservative index is 20% of All Stock Portfolio Risk.

DJ GLB Moderate Aggressive Index - The DJ GLB Moderate Aggressive is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Moderate Aggressive index is 80% of All Stock Portfolio Risk.

DJ GLB Moderate Conservative Index - The DJ GLB Moderate Conservative is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Moderate Conservative index is 40% of All Stock Portfolio Risk.

DJ GLB Moderate Index - The DJ GLB Moderate is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Moderate index is 60% of All Stock Portfolio Risk.

The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australia, Far East) index is an unmanaged index that is generally considered representative of the international stock market. MSCI Emerging Markets Index is designed to measure equity market performance in 23 emerging market countries. The index’s three largest industries are materials, energy and banks. The Russell 2000 is an unmanaged index of small cap securities. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The Bloomberg Barclays U.S. Corporate High Yield Bond Index is composed of fixed-rate, publicly issued, non-investment grade debt, is unmanaged, with dividends reinvested and is not available for purchase. The index includes both corporate and non-corporate sectors. The corporate sectors are Industrial, Utility and Finance which include both U.S. and non-U.S. corporations. An investment cannot be made in these indexes. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Small and mid-cap securities generally involve greater risks. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification. The performance noted does not include fees or charges, which would reduce an investor's returns. Asset allocation and diversification do not guarantee a profit nor protect against a loss. Debt securities are subject to credit risk. A downgrade in an issuer’s credit rating or other adverse news about an issuer can reduce the market value of that issuer’s securities. When interest rates rise, the market value of these bonds will decline, and vice versa. While interest on municipal bonds is generally exempt from federal income tax, it may be subject to the federal alternative minimum tax, state or local taxes. Chris Bailey is with Raymond James Euro Equities, an affiliate of Raymond James & Associates, and Raymond James Financial Services. Material prepared by Raymond James for use by its advisors.

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