Our detailed quarterly commentary is available here.
The first quarter of 2018 started off strong. The markets were supported by positive and broad-based economic data, solid corporate earnings reports, and the approval of a major tax reform package. However, February and March saw volatility sweep in as the likelihood of inflation became more realistic, and trade tariff concerns surfaced. After rising about 6% in January to record highs, equity markets suffered a 10% correction. We believe market volatility will continue as sentiment sorts out the benefits of tax cuts against the risks of international trade agreements, both within a rising rate environment.
On the fixed income side, we saw interest rate increases across all maturities. The 3-month Libor rose considerably, reflecting the actual and increased expectations of Fed tightening. The rate rise is being driven by (1) strong employment with newly apparent increasing wage pressures, (2) most key inflation measures moving to, and through 2%, (3) strong corporate earnings and equity market prices, (4) significant fiscal stimulus, (5) pro-growth policy shifts, and (6) global economic growth. Floating rate notes performed well in Q1 and over the past year as coupons adjusted upward with stable prices in the rising rate environment. Our fixed income portfolios benefitted significantly from our overweight position in floating rate notes.
As investors, we are seeing the positives of a growing economy and tax reform. However, the positives are coupled with some risks which include inflation and tariff/trade agreements. Our investment discipline is designed to take advantage of the opportunities that market risk and volatility create.