The year 2018 started with a strong equity rally in January, as investors around the globe cheered the synchronized economic expansion. However, the optimism quickly turned into concerns of faster monetary policy normalization under the robust job and wage growth. Then, the combination of tough tariff talks and geopolitical tensions added further confusion to the market.  

After the big zigs and zags, U.S. large-cap stocks (S&P 500 Index) ended the first quarter of 2018 with returns of -0.76%. International developed stocks (MSCI EAFE Index) were down 1.53%, and domestic small-cap stocks (Russell 2000 Index) were down 0.08% for the quarter. Encouragingly, the emerging market index (MSCI EM) generated a positive return of 1.42%.

On the fixed-income front, there was no shortage of volatility, either. The Barclays Capital Government Credit Index, a proxy for the broad U.S. fixed-income market, was down 1.58% for the first quarter. Other fixed-income sectors, such as emerging markets debt and bank loans, provided positive returns. The Federal Reserve (Fed) raised its benchmark rate (federal funds rate) in March to 1.50%-1.75%, and seems on track for further rate hikes in 2018.

• Net of all fees, the Equity Fund was down slightly at 0.12% and outperformed its benchmark, helped by a weighting of 16% in emerging markets.
• The Northern Trust Global Sustainability Index Fund (GSIF) was down 0.91%.
• The Stable Value Fund continued to perform better than lower-yield money market funds and returned 0.40%.
• The Bond Fund generated a negative return of 0.85%, but outperformed its benchmark through diversification into emerging markets debt and bank loans.
• The Balanced Fund had a return of -0.46%, reflecting underlying stock and bond returns, and outpaced the benchmark.
• Target Annuitization Date (TAD) Funds returned anywhere from -0.05% to -0.27%, with returns depending on the mix among stocks, bonds, and stable value assets.

The return of market volatility in 2018 feels different than the straight up market of 2017. While economic expansion, earnings growth, and still-accommodative monetary policies are the pillars for the market, geopolitical risks and policy uncertainties are unfortunately more than just noise.

We will continue to be vigilant in investing on your behalf, and will provide commentary on market conditions and outlook monthly, and as warranted, on the Pension Boards’ website at www.pbucc.org.

Thank you for your confidence in us.