Wall Street apparently stuttered at the start of 2018 with key equity gauges like the S&P 500 losing about 2.6%, Dow Jones shedding 3.5% and the Nasdaq composite adding barely 0.7% in the first quarter (as of Mar 28, 2018).
Though markets kicked off January on a strong note, increased inflationary expectations, chances of faster Fed rate hikes and the resultant uptick in Treasury bond yields caught investors off guard in late January and early February. Trump-induced trade fear (thanks to his announcement of import tariffs) and a tech rout in March did the rest of the damage (read: 5 Reason Why FANG ETFs Lost Their Charm in March ).
In any case, the first quarter is mostly downbeat every year with freezing cold locking people inside and slackening economic productivity. This year, GDP for Q1 is expected to be around 1.8% compared with 2.9% registered in Q4 of 2017.
Total market cap loss in the S&P 500 was about $2 trillion, which caused an erosion of 40% market cap gains in the S&P since Trump's win. Given this, here, we would like to note key ETF events of the first quarter that impacted market performance.
Spike in Bond Yields
The first quarter was all about rising rate worries. The yield on the benchmark U.S. Treasury started the year with 2.46%, hit a high of 2.94% in February, but finally came down to 2.77% on Mar 28. The average benchmark bond yield in Q1 was around 2.759%.
Rising rate worries brightened the appeal for low-duration or negative duration bond funds. WisdomTree Negative Duration High Yield Bond Fund HYND has added about 4.8% in Q1 while AdvisorShares Peritus High Yield ETF HYLD , which offers benchmark-beating yields like 7.21%, was up about 3.1%.
Fed Rate Hike
As widely expected, the Fed implemented the first rate hike of the year in its March meeting. The Fed raised the benchmark interest rates by a modest 25 bps to 1.50-1.57%. It marked the sixth-rate hike since the first lift-off in December 2015 (read: 5 ETFs to Profit From Fed Activity & Guidance ).
The Fed upgraded its forecast for 2018 GDP growth from 2.5% in December to 2.7% and beefed up the 2019 growth forecast from 2.1% to 2.4%. Federal funds rate projections for 2019 were upped to 2.9% from 2.7% while the rate is expected to accelerate to 3.4% from 3.1%.
Just after the Fed meeting, high-yield products like SPDR Bloomberg Barclays Convertible Securities ETF CWB , PowerShares Preferred Portfolio PGX) and iShares Morningstar Multi-Asset Income IYLD gained strength.
Trade War Fears
Trade war fears induced by President Trump's levy of import duties on certain items led Wall Street to suffer its worst week in more than two years in March. Trump signed an executive memorandum to levy tariffs worth about $60 billion against China for intellectual property theft. China announced a list of 128 U.S. products worth $3 billion as potential retaliation targets.
Just before that, Trump administration had imposed import tariffs on steel and aluminum but finally granted temporary relief to some of its key allies (read : Wall Street Recoups on Fading Trade Fear: 6 ETF Winners ).
There was a bloodbath in the market and specific ETFs like SPDR Dow Jones Industrial Average ETF DIA (down 3.1% in the last one month) and China fund SPDR S&P China ETF GXC (down 2.6%) lost heavily.
The technology sector witnessed peaks and troughs in Q1. The sector, which started off 2018 on solid note helped by emerging technologies, tumbled in March on a host of issues like Facebook's data breaches, failure of NVIDIA's self-driving car tests and short selling pressure on Twitter.
The more than 20% plunge in Facebook shares and 15% in Alphabet shares since late January worsened the market cap loss for the S&P. Still, PowerShares NASDAQ Internet ETF PNQI advanced 7.3% in the quarter but retreated 3.7% last month. Broader fund Technology Select Sector SPDR ETF XLK has gained up 0.1% year to date (read: 5 Reason Why FANG ETFs Lost Their Charm in March ).
Smooth Flow of Oil
Favorable demand-supply, geopolitical tensions in the Middle East, the OPEC output cut deal and a decline in production in Venezuela,which has the world's largest proven oil reserves , boosted oil prices in Q1. As a result, United States Oil USO was up about 8% and United States Brent Oil BNO gained about 5.1% in the quarter.
Gains in Grains
Some agricultural commodities fared well in the quarter.However, a subdued greenback and a crash in the equity as well as bond market turned the tide for soft commodity exchange-traded products.
Dry weather hurt cocoa in Ivory Coast, the world's largest producer. Plus, worries about diseases like cacao swollen shoot virus hurting production pushed up iPath Bloomberg Cocoa SubTR ETN NIB by 38% in Q1. Apart from cocoa, Teucrium Corn ETF CORN (up 2.8%), Teucrium Soybean ETF SOYB (up 3.6%) also provided market-beating returns (read: 3 Reasons to Buy Commodity ETFs This Year ).
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