Last week, we witnessed a major bifurcation in domestic equity performance, as consumer staples surrendered 4%, while energy and industrials gained 2.7% and 2.2%, respectively. The remainder of the market finished the week roughly 1.5% higher. First quarter earnings reports for the consumer products companies clearly illustrate a continued lack of pricing power and poor organic growth. This, despite stronger trends in wages and indications of persistent inflation trending higher. The weakness in consumer spending carried over into the technology sector, where shares of Apple were down on poor sales trends for the company’s iPhone product line. This led to a domino effect for the share prices of component manufacturers leaving the sector with a modest loss of 0.17% for the week. Energy shares were broadly strong this week, as OPEC’s three-year effort to eliminate the inventory overhang of crude oil approaches a successful conclusion. There is a growing consensus that the production agreement between OPEC member states and Russia to limit production will continue, thus supporting higher energy prices in the back half of 2018. Investors continue to exhibit a preference for the shares of smaller domestic companies, as the S&P 600 Index added 0.94% to the S&P’s 100 Index gain of only 0.25%. The same could not be said for international markets, however, as the MSCI EAFE® advanced 0.41%, and the MSCI EM lost 0.16%.
We are beginning to see investors embrace the return of volatility in stock prices, as recent reports indicate that investors have begun pouring money into investment products tied to stock price volatility. It was reported over the weekend that, last week, over $500 million was added to exchange traded funds focused on market volatility. This represents an attitudinal shift versus the approach we saw in February and March of either attempting to hedge against volatility or simply sell out and go to cash. As illustrated in Exhibit 1, volatility has something of a cyclical nature, and the pendulum is now swinging back towards greater price volatility. This creates investment opportunities for hedge funds, option traders, market timers and others, but more importantly, it opens the door for long-term investors who were not comfortable with the character of the market previously. The synchronization among asset classes and global markets has faded, restoring the balance between risk and reward.
Exhibit 1 (Source: Bloomberg)
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