Recently Cetera Investment Management wrote an article about the tariffs that the Trump administration has proposed and the market volatility that has resulted from the announcement. It is a continued reminder that diversification is key to long term investing strategies.
"While we return to volatility levels that are more typical, investors should remember to diversify their
portfolios and not have too much risk in any one area. Equities are at high valuations and bond yields
are still at relatively low levels. There are risks in both bonds and equities, so diversifying within and
amongst different asset classes is important."
The entire article follows below. If you have questions about this article or about your portfolio, please contact myself or Tim Swartley at (267) 384-5300.
Markets Continue Slide on News of Tariffs and Other Worries
The Dow Jones Industrial Average fell by over 1% for a third straight day on Thursday, something it
has not done in over two years. Markets tumbled after President Trump said the U.S. would impose
tariffs of 25% on steel and 10% on aluminum. This decision comes after the Commerce Department
released results of a study looking at whether steel and aluminum imports pose a threat to national
security. It concluded the imports do undermine national security. Trump also sited bringing back jobs
to America as a reason for the tariffs.
The news of tariffs took many on Wall Street by surprise. In addition, there were disagreements within
the Republican Party and business groups on whether tariffs should be implemented. Many contend
this move will cause China to retaliate with tariffs of their own and possibly create a trade war. China
has been flooding the world markets with cheap steel and aluminum due to their excess capacity,
causing the price of these metals to fall around the globe. Typically, the agriculture industry is the
target of tariffs abroad, but there were other industries directly impacted by the news. The share prices
of U.S. aircraft manufacturers fell sharply on the prospects of increased input costs. As expected,
domestic steel producers stocks rose on the news.
It has been a jittery week for investors, as the Federal Reserve Chairman, Jerome Powell, testified
before the House Financial Services Committee on Tuesday and the Senate Banking Committee on
Thursday. Investors were looking to glean any information they could from these hearings. On
Tuesday, Fed Chairman Powell told the House committee that his outlook for the economy has
strengthened since December. But when asked about the likely path of future interest rates, he
answered that the FOMC might pencil in four rate hikes this year, instead of the three hikes previously
forecast, if economic and inflation data warrant it. This comment jolted markets lower as the prospect
of a better economy was overshadowed by the prospect of higher inflation and additional Fed rate
hikes. Thus, good news was viewed as bad news.
The volatility we have seen this week is something we have been expecting for a while. As economic
data continues to improve, the Fed is becoming less accommodative and planning to raise interest
rates. The recent sell offs we have been seeing are actually normal on historical basis, though we
have not seen them in a long time. Before the correction and partial rebound in early February, we
had gone the longest period without a 3% sell-off (drawdown from peak) in the S&P 500 (311 trading
days). Taking all of this into a historical context, 3% selloffs generally happen every 32 trading days,
so the most recent period without such a pullback was really the anomaly.
While we have seen some market drops recently, we do not think we are in the beginning of a bear
market. Although rates have been rising, they are still relatively low and support higher valuations.
We feel the worries that the economy is too strong and will cause inflation are exaggerated at this
point. While the unemployment rate is low, we have yet to see extended periods of wage inflation.
The economy is also supported by strong corporate earnings, which should further benefit from tax
reforms.
While we return to volatility levels that are more typical, investors should remember to diversify their
portfolios and not have too much risk in any one area. Equities are at high valuations and bond yields
are still at relatively low levels. There are risks in both bonds and equities, so diversifying within and
amongst different asset classes is important.
Because markets are concerned with the sharp jump in bond yields, having lower duration exposure
(interest rate sensitivity) makes sense. However, since yields have risen so fast and domestic yields
trade much higher than other developed nations, we would not eliminate all duration in your portfolio.
Furthermore, it is imperative to diversify the types of exposure within fixed income. However, too much
high yield exposure can carry equity-type risk and defeat some of the diversification benefits of owning
bonds.
This report is created by Cetera Investment Management LLC
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Glossary
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks
traded on the New York Stock Exchange and the NASDAQ.
The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry grouping
(among other factors) designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe.