The US equity market ended the month having posted 15 consecutive months of gains for investors – and unprecedented feat. After a very strong year in 2017, this year began with investors displaying increasing optimism over market prospects, driven by robust earnings expectations and buoyed by the prospect of US corporate tax cuts. Rising rate expectations and an associated upward drift in longer term interest rates did little to disturb equity-market progress in January.
Since month end, however, volatility has returned with a vengeance. Despite an apparently supportive fundamental backdrop, a disappointing print on US wage inflation was sufficient to trigger a sharp sell-off in bond markets and puncture equity markets, which fell into correction territory. We had been anticipating a rise in volatility this year, but the speed and severity has taken us, and most market participants, by surprise, with markets displaying an extraordinary turn in sentiment on the back of only a limited change in fundamental dataflow.
In our view, the fundamental backdrop for equity markets continues to be supportive, but the recent volatility is unlikely to dissipate immediately. With central-bank policy tightening and the bull market in equites mature, valuations are now less forgiving, and we are reliant on improvements in corporate earnings, rather than multiple expansion, to make further progress.
We continue to invest in a range of diversified underlying stock-selection strategies and believe that we remain well-placed to withstand any further short-term volatility in markets.