As the month of March comes to a close, and along with it the first calendar quarter of 2018, investors chose to price in significant geopolitical risk, a shaky tech sector and the typical pre-earnings jitters.
This week, Wall Street is heading into a long weekend with its head held high. Thursday, March 29, brought the stock market significant gains, closing out the week with the Dow up 1.3% Thursday, the S&P up 1.4% and the Nasdaq up 1.6%. But Thursday's gains were out of sync with what was a tough month for equities.
For the 21 trading sessions in the month of March, the Dow spent 12 in the red, the S&P was lower 12 and the Nasdaq fell in 10 sessions. March wasn't the only dismal patch in the first quarter of 2018.
After January earned stocks their best monthly performance since March 2016, February brought investors their first down month in 10.
So much for that early optimism.
Here's a look back at the first quarter, during which the Dow lost 2.3%, the S&P lost 1.2% and the Nasdaq gained 2.3% for its seventh-straight positive quarter.
Risk Concerns Mounted
"After that [February selloff], investors became risk-averse. It's almost like they became hypersensitive," says Voya Investment Management's Karyn Cavanaugh. "Every little thing is sending investors scurrying for the exit."
For example, Wall Street this week was obsessively preoccupied with the thought of a trade war. Cavanaugh explained that everyone knows a trade war isn't good -- that shouldn't shock the market. But, this quarter, investors latched onto headlines that could be perceived as threatening. "They're pricing in all of the bad and none of the good," Cavanaugh said, "and I think that's a mistake."
"It was a leap frog of events," explains CFRA Chief Investment Strategist Sam Stovall. "A three-T event: tightening, trade and tech," he says, citing the possibility of Federal Reserve monetary policy tightening in January, trade threats in February and tech's selloff in March.
The "three Ts" drove enormous swings in value both into the green and the red. The Dow saw two 1,000-point single-day drops this quarter, but also a nearly 700-point single-day gain.
In 2017, there were just eight trading days in which the S&P 500 moved up or down more than 1% in a single session, Stovall points out. The average since World War II is 50 days of a 1% increase or decrease for the whole year. So far in 2018, there have been 23 days that the S&P 500 has moved more than 1%, leading to an annualized expectation of 88 such days for the whole year.
Per Cavanaugh's view, that's a symptom of trying to get ahead of the headlines. "We saw a lot of rotation," Cavanaugh notes. "There was a lot of jockeying for positions."
Stovall says that it took the S&P 500 just 13 calendar days to go from a record high to a 10% correction this quarter, which was the fastest since World War II. But the market was "ripe," he said, as stocks had gone 564 calendar days without a 5% drop on the S&P 500, also a World War II record.
Tech Took a Beating
Tech, typically the apple of Wall Street's eye, performed uncharacteristically poorly near the end of the first quarter. For tech specifically, losses are rooted in one big problem: Facebook Inc. (FB) . Following the Cambridge Analytica scandal, all of tech got bludgeoned. Excluding hearty gains Thursday, the Nasdaq handed over 3.2% in March.
For the last three months, tech was a mixed bag: Amazon.com Inc. (AMZN) stock rallied 23.6%, Facebook shares handed over 9.5% and Apple Inc.'s (AAPL) stock inched higher 0.8%. The Technology Select Sector SPDR fund (XLK) gained 2.2%.
"Investors got worried by one chink in the tech sector's armor," Cavanaugh says. She noted that this is unnecessary, as the sector's growth and earnings forecasts are some of the best in the market.
Jim Cramer and the Action Alerts Plus team hold positions in Facebook, Apple and Amazon for their Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Jim Cramer buys or sells FB, AMZN, and AAPL? Learn more now.
'The Antidote,' and Where You Should Take It
So what could stop this new overly analytical, borderline paranoid investing climate?
"The antidote for hypersensitivity is earnings growth," Cavanaugh explains. She forecasts 17% or more in earnings growth for the first quarter. Investors shouldn't worry about ominous news out of Washington or anywhere else until there is a material impact on earnings growth, she advises.
There's decent cause for optimism beyond just earnings, too. LPL Research Senior Market Strategist Ryan Detrick said in a Thursday note that April "has only showered gains lately." The month has brought the stock market higher in nine of the last 10 years, Detrick noted.
Stovall agrees. His data shows April has traditionally been the second-strongest months for stocks over the last 80 years, behind only December.
LPL forecasts double-digit S&P 500 returns in 2018, noting that "positive U.S. economic growth and strong earnings should outweigh trade policy and midterm election concerns."
"It might not be an easy ride like it was in 2017," Cavanaugh says, "but stocks are going to keep grinding higher and finish the year above where they are now."
Get the latest in investing news from TheStreet. Catch up here: