Volatility Returns but Economic Data
Points Towards Continued Growth

The 2017 calendar year was a strong year for the U.S. stock market and was accompanied by an extremely low level of volatility. In fact, as measured by the CBOE Volatility Index® (VIX®), 2017 was the least volatile year for the S&P 500 Index in over 25 years. So far in 2018, we have seen volatility return to more historical levels. The volatility has several underlying causes including concern over a trade war with China, large technology companies coming under more scrutiny, the Fed tightening monetary policy under a new chairperson and reversion to the mean after a strong 2017. Going into this year we had expected volatility to increase and worked to position our client portfolios appropriately. Despite the increased volatility, we continue to have a favorable long-term outlook for the market given the current fundamental strength of the U.S. and global economies.

In this quarterly commentary, we want to look at a few economic statistics to see how Main Street, not Wall Street, is doing. We believe statistics show that the economic backdrop for corporate earnings growth remains strong.

GDP Growth Accelerating U.S. GDP growth accelerated from 1.5% in 2016 to 2.3% in 2017.1 On average, economists expect 2018 GDP growth to accelerate to 2.7%.2 This economic growth isn’t limited to the U.S. as the International Monetary Fund estimates that global growth will increase 3.9% in both 2018 and 2019, up from 3.7% in 2017.3

Unemployment Rate Holding Steady at 4.1% The unemployment rate has stayed at 4.1% for six consecutive months. More importantly, the number of employed individuals in the U.S. increased 1.6% year-over-year in Q1 despite thousands of baby boomers retiring every day.4

Consumer Confidence Reached 17-Year High in February The Consumer Confidence Index was at 127.7 in March, up from levels seen one year ago. In February, the Index reached 130 which was the highest level since November 2000.5

Home Prices Growing Nicely As of January, home prices as measured by the S&P/Case-Shiller 20-City Composite were up 6.4% year-over-year and were only 0.7% below the peak in 2006.6 Home values in many cities are back above their prior peak and while interest rates have crept up over the last year, they are still well below historical norms.

Inflation Rising but Under Control As measured by the Consumer Price Index, inflation in the U.S. was 2.1% in 2017, up from 1.3% in 2016 and 0.1% in 2015.4 Economists expect inflation to increase modestly to 2.3% in 2018 and remain near that level in 2019 and 2020.2

Recession Probabilities Remain Low According to the Federal Reserve Bank of New York’s treasury rate model, there is only an approximate 5% chance of recession over the next 12 months.7 We suspect volatility will continue throughout 2018 as the market navigates international trade threats and negotiations, rising interest rates and a mid-term election. We don’t believe any of these are enough to derail the nine-year long bull market. We expect returns to moderate and volatility to rise, but we continue to believe solid economic fundamentals can reward patient investors.

 Sources 1. U.S. Department of Commerce 2. FactSet 3. International Monetary Fund 4. U.S. Department of Labor 5. The Conference Board 6. Standard + Poors 7. Federal Reserve Bank of New York 

—Adam Engebretson
Senior Portfolio Manager
April 2018



Kopp Investment Advisors 8400 Normandale Lake Boulevard Suite 1450 Bloomington, MN 55437 Tel: 952.841.0400 / 800.333.9128