|Global markets ended lower in the first quarter. US equities started the year strong, boosted by strong economic growth and robust earnings, but retreated in February and March. Most noteworthy was a return in equity market volatility, as measured by the CBOE VIX Index, which hit its highest level since August 2015. Against this backdrop, stocks beat bonds and leadership transitioned from large to small-cap stocks. The S&P 500 declined -0.76% while the Russell 2000 Index was essentially flat at -0.08% and the Barclays Aggregate Bond Index fell -1.46%. Growth style indices outperformed value style indices across capitalization.
Driven by security selection, our equities and convertibles strategies all generated positive absolute returns for the quarter and most outperformed their primary benchmark. (See Performance Summary, page 2 of the PDF). We continue to favor companies with long-term secular growth themes, more domestically-oriented revenue streams, and those with strong financials able to finance growth internally.
With Q1 reporting season just starting, we anticipate investors will shift their focus to the positive corporate earnings environment. According to FactSet, consensus estimates for S&P 500 EPS for CY 2018 increased by 7.1% to $157.77 from $147.24. We are generally optimistic about the potential for returns in the convertibles and equity markets, but expect sustained volatility. Markets remain vulnerable to risks, including elevated valuations, a deceleration of earnings momentum, inflationary pressures, a more hawkish Fed and geopolitical tensions.
We have strong conviction that the fundamental strength of the companies held across our portfolios will sustain the earnings and revenue growth acceleration we expect. We believe that the combination of equity and credit research we do provides differentiated insights that benefit our portfolios, especially regarding assessing potential risks. In a time of increased automated trading activity and heavy use of passive instruments like ETFs and ETNs, we believe selectivity and active management are increasingly important.
1Q:2018 Quarterly Update – Selection Key as Volatility and Correlations Rise
Surprising Divergence Between VIX and High Yield Credit Spreads Signals Economy and Corporate Earnings Stronger Than “Fear Gauge” Suggests
March 16, 2018