FFSS Investment Perspective
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March 2018 Investment Perspective
To Our Clients:
The market continued to reprice risk during the month. Last month the market dealt with rising inflation expectations. During March, President Trump imposed tariffs aimed at protecting American manufacturers. First a broad tariff on steel and aluminum imports was quickly followed by an additional $60 billion tariff on specific Chinese goods. China immediately responded with $3 billion in tariffs on U.S. goods. A key uncertainty is what if the Chinese stop purchasing U.S. Treasuries or start selling its existing holdings? If this happens interest rates will rise, at least temporarily, likely placing pressure on equities. Another factor influencing the market is turmoil in Washington D.C. Economic Advisor Gary Cohn resigned due to a difference of opinion on the tariffs. In response, bond yields have pulled back from the February highs as investors seek safety in Treasury bonds. For the month, the S&P 500 index and the Dow Jones Industrial Average posted losses of -2.69% and -3.70%, respectively. The NASDAQ fell -2.88%.
Two sectors which led the market higher in 2017, technology and financial, led the markets lower in March. Chief among the companies recently influencing technology was Facebook. Reports allege that Cambridge Analytica gathered data from 50 million Facebook users without their consent. The market is concerned about further government regulation and (if that occurs) the ramifications on the broader technology sector. In the financial sector the concern is rising interest rates, primarily the shape of the yield curve. True, interest rates are rising and rising rates are good for banks. However, most important to banks is the relationship between long-term and short-term rates. The yield spread between 10-year and 2-year Treasurys has slumped to approximately 50 basis points (0.50%), the narrowest since 2007, which is resulting in a flattening of the yield curve. Banks, and the financial sector as a whole, perform best when the yield curve is steepening.
The Fed met in March and raised its target for the Federal Funds Rate one-quarter-of-one percent (0.25% or 25 basis points). The rise in interest rates is a testament to the continued strength in the U.S. economy and of the job market in particular. New Fed Chairman Jerome Powell, at his first Capitol Hill testimony, told lawmakers that ”We’ve seen some data that in my case will add some confidence to my view that inflation is moving up to target (two percent). We’ve also seen continued strength around the globe. And we’ve seen fiscal policy become more stimulative… since the December meeting.” The market interpreted these remarks that the Fed could raise interest rates four times instead of three rate increases as currently expected.
Despite the two-month pull-back in the market averages, three pillars continue to support the market: 1) strong global growth, 2) increased corporate earnings and revenue growth, and 3) low global interest rates. In addition, the new tax bill’s lowering corporate and individual rates will stimulate our economy.
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