The markets provided some drama in the first quarter which contrasted starkly with an amazingly tranquil year in 2017. Although 2018 picked up where 2017 left off with low volatility and steadily appreciating markets, a massive spike in volatility emerged in early February that spooked investors. Markets quickly recovered but volatility remained elevated. As if to punctuate the new market tone, the S&P 500 finished four of the last five trading days of the quarter with moves of more than one per cent.

Of course there are many potential causes of anxiety. Continued tightening by the Federal Reserve, massive fiscal deficits, increasing concerns about tariffs and trade wars, the potential for higher inflation, and increasing backlash against many of the big tech stocks count among many legitimate concerns. The critical question for investors is: Is this increased volatility just a normal adjustment in an otherwise healthy market or is it a symptom of something more serious?

On most counts, major aspects of the investment landscape have not changed in any material way. Risk factors such as the Fed's plan to tighten slowly have been well communicated and implemented accordingly. The economy continues to grow modestly. Although revelations about data privacy breaches have gotten a lot more attention lately, they are not new. On the geopolitical front, concerns have increased about a trade war with China, but that is a lower risk than a real nuclear war with North Korea.

Another steady aspect of the landscape is tolerance for risk. As the Financial Times noted [here], "The last time the stock market showed this much enthusiasm for a handful of tech companies addicted to profitless growth, it was the height of the dotcom boom." While Tesla, a poster child of profitless growth, gave up some of its gains in the quarter, Spotify had a successful (and unique) public offering in the quarter which perpetuated the notion of "tying valuations to the promise of unspecified future profits."

Broad acceptance of risk was also demonstrated by the fact that stocks remain expensive across the board. As John Hussman reports [here], "the current episode of overvaluation has been much, much broader than we observed during the 2000 tech bubble." In contrast to the environment in which "many stocks were quite reasonably priced even at the 2000 peak," Hussman notes, "Today ... valuations are uniformly extreme across the entire stock market."

Risk tolerance also extends down to the small cap Russell 2000 index. As Grants Interest Rate Observerreported in its April 4, 2018 edition, "At year-end 2016, 33.9% of Russell [2000] component companies were making net losses. It was close to the highest such percentage in any non-recession year since 1984." And now, five quarters later, "Upwards of one-third of the Russell's corporate components continue to show net losses."