23 May 2018 Trends In Share Prices
The trends in share prices in 2018 has been less directional than 2017 as January’s surge in prices was offset by choppy market conditions in February, March and April. The Euphoria experienced in January gave way to a drop in share prices as trade, geopolitics and monetary policy have generated a wall of worry. 2018 has seen its fair share of volatility which did not exist in 2017. The rise in the dollar has also generated a headwind for stock prices, as multinational companies find that sales overseas are getting more difficult to come by.
Volatility Returns with a Vengeance in 2018
Volatility returned with a vengeance in 2018, as the smooth ride experienced by stock investors in 2017 was quickly wiped away. Pullbacks in share prices in 2017 were few and far between as the S&P 500 did not experience a retracement of more than 3%. This is the first time on record that this has occurred. The February correction in share prices saw many large cap stocks move into bear market territory. Apples shares dropped 15% from its highs in January to its lows in February. Facebook shares tumbled 23% from its highs in January to its lows in March. The substantial volatility that has come to the surface in 2018 has led many to learn how to trade shares with iFOREX, a reputable broker in the CFD market.
Fed Continues to Raise Rates
The divergence in monetary policy between the Fed, who is raising rates, and Europe and Japan which have accommodative monetary policy, has created choppy trading conditions. The dollar has surged higher as interest rate differentials favor the greenback, which has generated headwinds for many multi-national companies. U.S. domestic companies have surged higher following the new tax law passed for 2018. Many companies in the U.S. have seen their tax rate drop from 35% to 20%. This is a windfall gain for 2018, which has been reflected in the breakout in small cap stocks. Unfortunately, rising rates are generally an ominous sign for shares. Higher interest rates increase the discounting function on stocks. Since stock valuations are based on the future value of company cash flows, higher rates reduce future cash flows which reduce the present value of share prices.
Trump and Trade
The White House has also participated in generating volatility for share prices. By trying to fulfill his campaign promises, President Trump used his executive order power to place tariffs on steel and aluminum. Tariffs can quickly lead to a trade war and the U.S. is now participating in bilateral negotiations with China. China has threatened to retaliate with their own set of tariffs which has hit farmers and other targeted industries in the United States. Trump also pulled out of the Iran Nuclear agreement which has sent oil prices higher, lifting the XLE ETF but also generating significant share price volatility.
Share prices in 2018 have experienced more volatility than in 2017. The combination of higher interest rates, trade negotiations, and geopolitics has created unwanted volatility. While volatility was subdued in 2017, the trend in volatility in 2018 is more than average and likely to continue throughout the rest of 2018.