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    March Madness

    For three weeks in early spring, fans have learned to expect the unexpected as the NCAA Men’s Basketball Tournament, better known as March Madness, dominates TVs and headlines. This nationwide obsession is an annual tradition steeped in an 80-year legacy, starting back in 1939 with only eight schools. Now with 68 teams vying each year for their place in history, the tournament is as popular as ever. And understandably so, with all the excitement, the traditional power houses, the lovable underdogs, the heartbreaks, last minute buzzer beaters, and simply the uncertainty.

    College basketball fan or not, many get in on the action, and the scale is remarkable. An estimated 70 million brackets were completed this year. Many of which took place in friendly office pools, where companies often turn a blind eye in the spirt of camaraderie, despite the losses due to distracted employees over those days, which is estimated to be over $6 billion according to a report by financial site WalletHub.

    As we close another chapter of this annual tradition, it was yet another captivating season full of surprises, like the victory of a 16-seed over a one-seed, a first in tourney history. The Cinderella story belonged to Loyola-Chicago, making it to the Final Four, a feat no other ACC, PAC 12 of SEC squad achieved.  But in the end, number one seed Villanova emerged as this year’s champion.

    Though not a game, the financial markets felt more like complacent “regular season play” in all of 2017, steadily marching higher with little volatility. By comparison, the first quarter of 2018 had the emotional madness of those three collegiate basketball weeks in March. The broader domestic equity market started the year strong, logging one of the best January performances in 21 years. Then in February, the market declined over 10% from its Jan. 26 peak – entering the first correction since early 2016.  Markets were able to stage a rebound, but ended the quarter down slightly from the start of the year.

    Multiple factors fueled the wild swings, starting when market participants grew worried of faster Fed tightening when the employment situation report for January revealed an increase in wages. There was also the seemingly endless investigation of Russian interference in the 2016 election, the chaotic revolving door of White House personnel, and a myopic focus on the intensified trade tensions. Even the high flying and recent powerhouse “FAANG” stocks (Facebook, Apple, Amazon, Netflix, and Alphabet’s Google) were not immune to the madness, with leaky data policies at Facebook, and Amazon squarely in the crosshairs of President Trump’s latest Twitter barrage.

    Most broad asset categories suffered minor losses in the quarter. Domestic large cap stocks, as measured by the Russell 1000 Index, were down 0.7% in the quarter, but remain up 14% over the last twelve months. In a reversal of recent trends, domestic small caps fared slightly better, decreasing only 0.1%.  Selling pressure was not isolated to the United States, as the MSCI EAFE Index declined 1.5%.  Emerging markets were a bright spot however, advancing 1.4% and leaving the asset class up nearly 25% over the last year. In terms of style, growth stocks performed well, with all segments across capitalization and geography exhibiting positive performance, helped by broad strength in technology and consumer discretionary stocks. Value stocks were generally detractors, pressured by weakness in consumer staples and telecommunications.

    In periods of heightened volatility and weakness in equities, bonds often perform well as investors gravitate to their relative safety. In this quarter however, bonds were susceptible as rising rates challenged securities across the curve, with shorter bonds faring better than longer bonds. The yield on the two-year Treasury rose 39 basis points to 2.28%, while the 10-year Treasury yield climbed 37 points to 2.77%, resulting in further flattening of the yield curve. The Bloomberg Barclays U.S. Aggregate Bond Index, was down 1.5% for the quarter, but remains up 1.2% over the last twelve months.  Lower quality bonds coped better, as the Bloomberg Barclays U.S. Corporate High Yield Index slipped only 0.9%.  Floating rate bonds were an exception as the S&P/LSTA Leveraged Loan Index rose 1.5%, but the highlight belongs to global bonds, up 3.6% in the quarter.The tipoff to the second quarter offers little solace, with skittish markets reacting to new worries that seemingly surface every few weeks. The economic bench is deep though, as global growth clips along at a healthy pace, underlying fundamentals are strong, and earnings robust. As can be expected at this stage of the cycle, there are some signs of burgeoning inflation, but both prices and rates are expected to rise at only a gradual pace. Moreover, though global monetary policy is starting to normalize, it remains accommodative, and domestic fiscal policy has recently come into play as the sixth man, offering a further leg to this exhaustive expansion.

    So, while Villanova has been crowned the NCAA champions and ended the 2017-18 season by cutting down the nets, investing is ongoing. Coaches, teams, and fans have the luxury to recollect over the next six months until the new season begins. But for investors, the full court press continues and we will likely need to contend with the volatility and uncertainty over the near term. While investing is not a game, it can be wrought with emotions just like the tournament, but by focusing on the long term, maintaining diversification, and remaining disciplined, investors can minimize some of the madness.

    Market Trends is written by Reliance’s Josh Marble. Questions or comments on Market Trends, LifeStyles portfolios or other investment services offered by Reliance, contact Joshua.marble@fisglobal.com.The material herein is based on data from sources considered to be reliable, but it is not guaranteed as to accuracy, does not purport to be complete and is subject to change without notice. This communication is for informational purposes only. Use by other than intended recipients is only allowed prior to Reliance Financial Corporation’s consent. Sender accepts no liability for any errors or omissions arising as a result of transmission. Any comments or statements made herein do not necessarily reflect those of Reliance Financial Corporation or its affiliates.