For the first time in nine calendar quarters, the U.S. investment markets delivered a negative overall return.  It was only a slight decline, but the decline reminds us that markets can and do go down from time to time.

The first quarter saw the first correction—that is, a decline of more than 10% in three years, which dragged returns down from a roaring start to the year.  Industry pundits have many triggering effects to point to, from chaos in the White House to the possibility of a global trade war, to fears of inflation or higher interest rates, to the simple fact that U.S. stocks have been priced much higher than their historical averages. They aren’t getting much explanatory data from the economic statistics; the unemployment rate is testing record lows and new jobs are being created at record levels.  More importantly, annual earnings estimates for S&P 500 companies rose 7.1% during the first three months of the year—the fastest rise since FactSet began keeping track in 1996.

Ironically, the small downturn plus the jump in earnings may have forestalled a bigger corrective bear market later.  The S&P 500, by some measures, is now trading at 16.1 times projected earnings for the next year, compared with 18.6 in late January when the markets were extraordinarily bullish.  Stocks are not as overpriced as they once were, and the corporate tax cut could lead to higher reported earnings throughout the year.

Some are questioning whether the large cap indices fully reflect the overall U.S. economy these days. As mentioned earlier, the technology sector is generating positive returns.  If you were to take, Microsoft, NetFlix, NVIDIA Corp., Cisco Systems and Apple, Inc. out of the S&P 500, the downturn would have been much worse, as companies like Procter & Gamble, Exxon Mobil and General Electric all lost value.  As tech roars and more traditional companies see their shares losing value, technology makes up a greater portion of the capitalization-weighted indices, and its returns will have a higher impact in the future.

This is a good time to fasten seat belts, and also consider whether you’d have the patience to ride out a bear market.  We can’t predict when that will happen, of course, but I think everybody realizes that the bull market cannot last forever.

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Scott Carlson