First Quarter Marked by Return of Volatility


  • The S&P 500 nine-quarter win streak has ended, with stocks down in a volatile first quarter.
  • Bright spots in the quarter’s market performance included: growth, small caps, technology, consumer discretionary, and emerging markets.
  • While risks remain, market fundamentals have not deteriorated and economic growth remains on pace.

Market volatility resurfaced in the first quarter of 2018, following the stock market’s calm and steady rise in 2017. This week’s Weekly Market Commentary recaps first quarter stock market performance, discusses some of the themes that were in play, and summarizes our outlook for the rest of the year.


Stocks fell slightly in the first quarter, losing 0.8% on a total return basis and ending a streak of nine quarterly wins for the S&P 500 Index. The return of volatility was the big story of the quarter (besides the bull market’s ninth birthday), as the index suffered its first 10% correction since January 2016. Weakness was driven by several factors that led to the return of market volatility:

    • Federal Reserve (Fed) fears. Heightened concerns that the Fed would quicken its pace of rate hikes after a bigger than expected increase in wages was the primary catalyst that drove the stock market correction in late January through early February. In addition, markets tend to test new Fed chairs, as they did when Alan Greenspan, Ben Bernanke, and Janet Yellen began their terms. Jerome Powell’s introduction was no different; in fact, Powell’s welcome was one of the most unpleasant, with the S&P 500 tumbling more than 4% on his first day in the new role.Our view: We expect two more rate hikes in 2018, as we suspect the worst of the pricing fears will fail to materialize. We believe a move higher in the 10-year Treasury yield this year will be gradual and therefore manageable for the equity markets as inflation remains under control.
    • The short volatility unwind. Though not the root cause of the correction, the sell-off intensified because of a complicated and crowded trade where investors essentially bet on volatility staying low. Once volatility began to increase in late January, many market participants who had aggressively expressed that view were caught on the wrong side of the trade. Our view: We believe the market disruptions from the unwinding of short volatility trades are largely behind us, though we continue to expect further, periodic bouts of market volatility over the course of 2018.