Reversing the trends of 2017, US markets generally declined in the first quarter of 2018 while volatility increased significantly. Volatility returned to the market as liquidity conditions tightened and interest rates increased due partly to a modest increase in inflationary pressures and an anticipated increase in US Treasury issuance to fund expanding deficits. Stocks and bonds both generated negative returns for the quarter. The positive correlation between stocks and bonds likely enhanced volatility in February, as many factor-based strategies were required to reduce the gross exposure of their portfolios. With the yield on the 2-year US Treasury now higher than the dividend yield for many stocks, further increases in Treasury rates will likely continue to pressure stock valuations. Offsetting the downward pressure on stocks from higher interest rates is the combination of increased federal spending and a material reduction in corporate tax rates. While the acceleration in global synchronized growth has likely peaked, we do expect the US to continue to grow at a modest rate, further tightening employment conditions. Earnings growth should remain positive in 2018. However, rising input costs, increased corporate borrowing costs, and further tightening by global central banks will likely keep volatility elevated throughout 2018.
During the quarter, the Saratoga Mid Cap Portfolio’s negative relative performance was primarily driven by stock selection within the Industrials, Consumer Discretionary, and Technology sectors. Positively, the Portfolio was underweight REITs, one of the market’s worst performing sectors, and overweight financials, one of its best. Stock selection within the Energy sector also contributed to relative performance.
Information contained herein was obtained from recognized statistical services and other sources believed to be reliable and we therefore cannot make any representation as to its completeness or accuracy. Any statements not of a factual nature constitute opinions which are subject to change without notice.
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