Volatility returned to markets in the first quarter of 2018. After marking a new record high on January 26, the S&P 500 corrected dramatically in the first part of February, likely due to a better than expected increase in wages and subsequent increases in interest rates. Markets were also concerned about the elevated rhetoric in regards to tariffs and disruptions this would cause to global trade. The February sell-off was the first decline of ten percent or more since Fall 2016. The market regained most of the lost ground by mid-March but gave up much of those gains by month end. The S&P 500 ended the quarter down 0.76%. International markets similarly declined early in the quarter before staging a more modest recovery before selling off again at the end of March. The MSCI EAFE, a common international benchmark, fell 1.58% during the first quarter.
Long-term rates rose during the quarter. The ten-year treasury yield increased from 2.40% at the end of the year to 2.74%. Short-term rates have also continued to tick up. The Federal Open Market Committee (FOMC), the body that sets short-term interest rates, voted to raise rates again at their March meeting. They indicated two more rate increases were likely this year barring any surprises to the economic landscape. Inflation, briefly a concern following data in February, has since moderated. Jerome Powell replaced Janet Yellen as Fed Chair and presided over his first press conference following the March meeting. Markets closely monitored his comments and though he speaks with more candor than Ms. Yellen, there was no indication that his regime would deviate from previous FOMC policy.
We expect market volatility to continue its return to normal levels in 2018. The 2017 calendar year was an anomaly in terms of volatility: last year, the S&P 500 closed up or down more than 1% only 8 times. Over the last 10 years this number has averaged close to 50. So far this year, the market has experienced 23 days of greater than 1% daily changes. Political and geopolitical uncertainties, trade issues, and the leadership transition at the FOMC are just a few of the issues that could cause markets to oscillate. We have actively trimmed stocks in most accounts and reduced the overweight to risk assets slightly at our most recent Investment Committee meeting, but despite increased volatility, our outlook for stocks is still positive. Corporate tax cuts and economic growth should provide a strong tailwind to earnings. International economies are still at the early or middle stages of recovery and foreign markets still appear to be reasonably priced.
We believe that stocks represent the best opportunity to build wealth. Inflation remains the key long-term risk to our customers achieving their investment goals. As I mentioned, we remain overweight in equities and continued to increase our international exposure throughout the quarter adding to both developed and emerging areas of the asset class.
It has been a long time since markets have delivered a negative quarter and it can be easy to lose sight of long term goals during increasingly volatile markets. So please remember we are here to answer your questions and make sure that your current asset allocation is still appropriate for your circumstances. If it has been a while since you have visited with us please do not hesitate to call or email and set up a meeting with your Hills Bank Trust and Wealth Management Officer.Some trust products and IRA contributions/balances are not a deposit, not FDIC insured by any federal government agency, not guaranteed by the bank and may go down in value.