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2018 Q1 Vital Signs: Hello, Stranger

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Market risk never disappears. Sometimes it’s hidden, sometimes it’s ignored. But risk—the potential for loss—is always present. Q1 2018 marked the first negative quarter for equity markets since 2015—only the second quarter out of the last 21. Down quarters are common, so this is not a normal state of affairs. Perhaps investors have become complacent as a result. Risk management—planning for not just the ups but the downs—is most needed when it appears to be less relevant.


Image - Vital Signs 1Q18 - Qtly Returns

Image - Vital Signs 1Q18 - Is the S&P500 Diversified

  • In recent years, returns of the market cap-weighted S&P 500® have been highly correlated to the tech sector. Investors must consider if their portfolios are truly diversified.

Image - Vital Signs 1Q18 - Perf of a Diversified

  • A broadly diversified portfolio returned -1.2% in the first quarter. However, it gained 9.0% over the past year.
  • Developed equity markets fell modestly in the quarter, while emerging markets notched a gain (1.4%). The technology and consumer sectors were strongest, while staples, energy, and real estate struggled.
  • Bonds generally dropped during the quarter and thus did not hedge equity losses.
  • The average level of volatility in Q1 (as measured by the “VIX®” index) was 56% higher than 2017’s quarterly averages.

Image - Vital Signs 1Q18 - Table-Annual Returns

Past performance is not indicative of future results.
1Source: Ned Davis Research. © 2018 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All rights reserved. See NDR disclaimer at www.ndr.com/copyright.html.
For data vendor disclaimers refer to www.ndr.com/vendorinfo. Rolling returns are annualized average returns for a period, ending with the listed year.
2Source: Virtus Performance Analytics.

The Diversified Portfolio assumes the following weights: 25% in the S&P 500®, 10% in the Russell 2000®, 15% in the MSCI EAFE®, 5% in the MSCI EM, 25% in the Bloomberg Barclays U.S. Aggregate, 5% in the Bloomberg Barclays U.S. Treasury Bill 1-3 Month Index, 5% in the Bloomberg Barclays Global High Yield Bond Index, 5% in the Bloomberg Commodity Index, and 5% in the FTSE Nareit Equity REITs Index. Assumes annual rebalancing. Data represents total return for stated period. The Diversified Portfolio is not representative of any Virtus portfolio. Investors should consult their financial professional to identify suitable portfolio allocations. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio, or that diversification among different asset classes reduces risk.

Index Definitions—The S&P 500® Index is a free-float market-capitalization weighted index of 500 of the largest U.S. companies. The index is calculated on a total return basis with dividends reinvested. The VIX® (Chicago Board Options Exchange (CBOE) Volatility Index) shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The Russell 2000® Index is a market capitalization-weighted index of the 2,000 smallest companies in the Russell Universe, which comprises the 3,000 largest U.S. companies. The MSCI EAFE® Index (net) is a free-float-adjusted market-capitalization weighted index that measures developed foreign market equity performance, excluding the U.S. and Canada. The index is calculated on a total return basis with net dividends reinvested. The MSCI Emerging Markets Index (net) is a free float-adjusted market capitalization-weighted index designed to measure equity market performance in the global emerging markets. The index is calculated on a total return basis with net dividends reinvested. The Bloomberg Barclays U.S. Aggregate Bond Index measures the U.S. investment grade fixed rate bond market. The index is calculated on a total return basis. The Bloomberg Barclays Global High Yield Bond Index is a multi-currency flagship measure of the global high yield debt market. The index represents the union of the US High Yield, the Pan-European High Yield, and Emerging Markets Hard Currency High Yield Indices. The high yield and emerging markets sub-components are mutually exclusive. Until January 1, 2011, the index also included CMBS high yield securities. The index is calculated on a total return basis. The Bloomberg Barclays U.S. Treasury Bill 1-3 Month Index includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value. In addition, the securities must be denominated in U.S. dollars and must be fixed rate and non convertible. The Bloomberg Commodity Index is composed of futures contracts on physical commodities and represents 22 separate commodities traded on U.S. exchanges, with the exception of aluminum, nickel, and zinc. The FTSE Nareit Equity REITs Index is a free-float market capitalization-weighted index measuring equity tax-qualified real estate investment trusts, which meet minimum size and liquidity criteria, that are listed on the New York Stock Exchange, the American Stock Exchange, and the NASDAQ National Market System. The index is calculated on a total return basis with dividends reinvested. The indexes are unmanaged, their returns do not reflect any fees, expenses, or sales charges, and they are not available for direct investment.

Investing involves risks and the possible loss of principal. This report is based on the assumptions and analysis made and believed to be reasonable by the Adviser. However, no assurance can be given that the Adviser’s opinions or expectations will be correct. This report is intended for informational purposes only and should not be considered a recommendation or solicitation to purchase securities.

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