We started 2018 with expectations for strong earnings and an outlook for a solid year. As January unfolded, returns accelerated as the effect of the Tax Cuts and Jobs Act passed in December clarified. On earnings calls and corporate releases we learned of growing earnings expectations and investment plans to meet increased demand.

By early February, we were in the middle of a correction, the first in two years. Markets began to decline first on the larger than expected wage growth for January and some profit-taking, but they accelerated on technical factors related to speculations on low volatility. This trade worked in 2017, but had become so large and widespread that it only took a small increase in volatility to revert to a loss position, forcing speculators to reverse course and sell.

With trade issues and uncertainties taking over for front page news, we are in a different place now. Starting with tariffs proposed by the U.S. against mostly friendly trading partners, attention quickly pivoted to China. A trade dispute would more accurately describe what we have seen so far rather than war, although the latter is still possible. The initial proposed tariffs on $50b in Chinese imports were met with a similar response on U.S. exports to China. However, actually implementing such tariffs will take time and negotiations between the countries has already begun.

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