From the Desk of


It’s certainly been an eventful start to the year for global financial markets. Though the first quarter ended with major developed equity market indices down only slightly, those numbers mask a very turbulent period in which stock prices were whipsawed. Bonds also experienced gyrations, with the yield on the 10-year Treasury moving from 2.41% at the start of the quarter to a peak of 2.95% before ending at 2.74%.

Indeed, the biggest story of 2018 so far has been the return of market volatility, following a year and a half in which stock prices rose essentially without interruption and investors seemed impervious to any hint of bad news. That has changed as markets, despite still-favorable economic conditions, have begun to grapple with a number of concerns, including rising trade tensions and the possibility that firming inflation might lead to more aggressive Fed policies.

QU 1Q18 Peron Chart 1

After an extended period of extraordinary calm, investors can be forgiven for forgetting that volatility spikes in the capital markets are not unusual even in the best of times. In fact, the recent pullback has been well within the normal range of annual market movements. On average, the S&P 500 has experienced a decline of 10% or more in almost half of the calendar years since 1980. In all but six of those instances, the market ended the year in positive territory.

As investors, we believe the most important thing to keep in mind is that bear markets outside recessions are rare and that the outlook for the economy, and especially corporate profits, continues to be quite positive. Already, strong earnings growth will likely see a significant boost in 2018 due to recently enacted tax cuts, and we estimate that average overall earnings per share for the S&P 500 could rise 13% to 15%. History has shown that corporate profits are usually the most influential driver of stock prices. Meanwhile, valuations have also become a bit more attractive.

QU 1Q18 Peron Chart 2


For much of this long-running bull market, equities have been in a sweet spot. Interest rates and inflation have stayed low while economic and earnings growth prospects have been good. This has given investors the confidence that expected stock returns would be superior to those of bonds and other investments. We don’t think we have moved beyond this sweet spot just yet, but financial markets do seem to be coming to terms with the idea that things are beginning to change. The investment landscape is growing more challenging and will likely become more volatile as investors adjust to a more typical late-stage expansion environment that includes higher inflation, rising interest rates, and less accommodative monetary policies.

Already this year, we have seen greater return dispersion across and within asset classes. None of this means there are not more worthwhile gains ahead for investors, but it does highlight the value of active management and the need to become more selective. Beginning in 2017, both our equity and fixed income research teams made deliberate risk-mitigating portfolio decisions. These decisions have helped fortify client portfolios to weather the turbulence we are experiencing while still leaving them well positioned to take advantage of an investment outlook that remains positive.

QU 1Q18 Peron Chart 3

Within equities, we have carefully and methodically lowered our risk exposure. Today, our emphasis is more on quality companies and less on cyclical earnings growth. In our equity income strategy, we have reduced exposure to rate-sensitive sectors like utilities and are focusing on companies that can consistently and predictably grow their dividends, which we feel can offset some of the effects of rising rates and help drive our longer-term total returns.

For fixed income portfolios, we have made a number of changes to reflect a higher rate environment. These include shortening duration and increasing credit quality in recognition of late-cycle indicators. Most notable, though, has been our greater focus on floating rate securities, which have coupons that adjust higher when short-term interest rates move upward. With the Fed expected to hike interest rates another three times this year, these bonds provide extra income with lower price sensitivity.

QU 1Q18 Peron Chart 4

More changes are likely to come as we continue to digest the maturing nature of the cycle. A maturing investment cycle brings its own challenges but also opportunities for investors who can proactively respond to a shifting financial environment. Our relationship with you is very important to us. If there is something you would like to discuss, please contact your advisor or portfolio manager. If I can be of assistance to you, please contact me directly at

Read the next article in the series: Markets May Be Shaky but the Economy Is Doing Fine.

Index Definitions 

The Standard & Poor's 500 Index (S&P 500) is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.

MSCI Emerging Markets Asia Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the Asian emerging markets.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. As of June 2007, the MSCI EAFE Index consisted of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.

The MSCI Europe Index is a free float-adjusted market capitalization index that is designed to measure developed market equity performance in Europe. As of September 2002, the MSCI Europe Index consisted of the following 16 developed market country indices: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom.

The Barclays Aggregate Bond Index is composed of U.S. government, mortgage-backed, asset-backed, and corporate fixed income securities with maturities of one year or more.

The Barclays High Yield Municipal Index covers the high yield portion of the U.S.-dollar-denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds.

The Bloomberg Barclays U.S. Corporate High Yield Index is an unmanaged, U.S.-dollar-denominated, nonconvertible, non-investment-grade debt index. The index consists of domestic and corporate bonds rated Ba and below with a minimum outstanding amount of $150 million.

S&P Leveraged Loan Indexes (S&P LL indexes) are capitalization-weighted syndicated loan indexes based upon market weightings, spreads, and interest payments. The S&P/LSTA Leveraged Loan 100 Index (LL100) dates back to 2002 and is a daily tradable index for the U.S. market that seeks to mirror the market-weighted performance of the largest institutional leveraged loans, as determined by criteria. Its ticker on Bloomberg is SPBDLLB.

The Dow Jones Select Dividend Index seeks to represent the top 100 U.S. stocks by dividend yield. The index is derived from the Dow Jones U.S. Index and generally consists of 100 dividend paying stocks that have five-year non-negative Dividend Growth, 5-year Dividend Payout Ratio of 60% or less, and three-month average daily trading volume of at least 200,000 shares.

The Bloomberg Commodity Total Return Index, formerly known as Dow Jones-UBS Commodity Index Total Return (DJUBSTR), is composed of futures contracts and reflects the returns on a fully collateralized investment in the BCOM. This combines the returns of the BCOM with the returns on cash collateral invested in 13-week (three-month) U.S. Treasury Bills.

The Corporate Emerging Market Bond Index (CEMBI) is JP Morgan's index of U.S.-dollar-denominated debt issued by emerging market corporations.

The Standard & Poor's Small Cap 600 Index (S&P 600) measures the small-cap segment of the U.S. equity market. The index is designed to track companies that meet specific inclusion criteria to ensure that they are liquid and financially viable.

Nasdaq 100 Index is an index composed of the 100 largest, most actively traded U.S. companies listed on the Nasdaq stock exchange.

The U.S. Treasury 10-year Note is a debt obligation issued by the United States government that matures in 10 years. A 10-year Treasury Note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity.

The Shanghai Stock Exchange (SSE) composite is a market composite made up of all the A shares and B shares that trade on the Shanghai Stock Exchange.

Indices are unmanaged, and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.

Important Disclosures 

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources, and, although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. Investing in international markets carries risks such as currency fluctuation, regulatory risks, and economic and political instability. Emerging markets involve heightened risks related to the same factors, as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks and less developed legal and accounting systems than developed markets.

Concentrating assets in the real estate sector or REITs may disproportionately subject a portfolio to the risks of that industry, including the loss of value because of adverse developments affecting the real estate industry and real property values. Investments in REITs may be subject to increased price volatility and liquidity risk; concentration risk is high.

Investments in Master Limited Partnerships (MLP) are susceptible to concentration risk, illiquidity, exposure to potential volatility, tax reporting complexity, fiscal policy, and market risk. Investors in MLPs are subject to increased tax reporting requirements. MLP investors typically receive a complicated schedule K-1 form rather than Form 1099. MLPs may not be appropriate investments for tax-advantaged accounts because of potential negative tax consequences (Unrelated Business Income Tax).

There are inherent risks with fixed-income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer-duration fixed-income securities and during periods when prevailing interest rates are low or negative. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors' incomes may be subject to the Federal Alternative Minimum Tax (AMT), and taxable gains are also possible. Investments in below-investment-grade debt securities, which are usually called “high yield” or “junk bonds,” are typically in weaker financial health and such securities can be harder to value and sell, and their prices can be more volatile than more highly rated securities. While these securities generally have higher rates of interest, they also involve greater risk of default than do securities of a higher-quality rating.

Investments in emerging market bonds may be substantially more volatile, and substantially less liquid, than the bonds of governments, government agencies, and government-owned corporations located in more developed foreign markets. Emerging market bonds can have greater custodial and operational risks and less developed legal and accounting systems than developed markets.

As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money. Returns include the reinvestment of interest and dividends. Investing involves risk, including the loss of principal. Diversification may not protect against market loss or risk. Past performance is no guarantee of future performance.