- Privacy concerns drag Facebook/Technology sector lower
- Dow Jones Industrial Average enters negative territory on year-to-date basis
- Fed widely expected to raise rates this week, hint at future rate hikes
Equity markets began the week with a sell-off that sent the Dow Jones Industrial average into negative territory on a year-to-date basis. The technology sector, which has lead performance this year, is dragging markets down on reports that Facebook’s user information was misused. Shares of the social media giant fell over 7% in intraday trading on reports that the Trump campaign gained inappropriate access to more than 50 million users, which triggered deeper concerns about data security. The S&P 500 was down around 2% and the tech heavy NASDAQ Composite was down roughly 2.5% on Monday.
Investors were already on edge this week, because the Federal Open Market Committee closes their two-day meeting with a press conference on Wednesday. It is widely expected that they will raise short-term interest rates by another 0.25% to a targeted range of 1.50% - 1.75%. The market will be paying more attention, however, to whether the committee signals an additional rate hike in 2018. At the beginning of the year, the Fed thought three hikes was warranted, but the recent tax cuts may fuel the economy and thus inflation more than expected, giving the Fed room for an extra hike.
As if investors did not have enough to worry about, this comes on the heels of steel and aluminum tariffs, which many fear could start a trade war. Typically, the agriculture industry is the target of tariffs abroad, but there were other industries directly impacted by the initial news. These fears could have an unseen benefit in them though. Tariffs could potentially slow down the economy and cause the Fed to hold off on the pace of interest rate hikes. Bad news could be good news. Another possibility could be that tariffs cause more inflation and, thus, more rate hikes. Which countries are exempt from tariffs and how this all plays out remains to be seen.
As you can see, there is growing uncertainty in the markets right now. We have already seen volatility increase from abnormally low levels this year and we expect this trend to continue. As the Fed becomes less accommodative and yields rise, there should be more volatility in both bonds and stocks. We continue to stress that corporate fundamentals remain positive, with strong corporate earnings, tax reform benefits to both the consumer and business, and moderate amounts of inflation, which we expect, can be good for the economy as it allows companies to raise prices.
As we mentioned in our 2018 market outlook, equity valuations were high entering the year, so we could see more price volatility as valuation adjust to higher interest rates and inflation expectations. Again, diversification is even more important during times of market volatility. There are risks in both bonds and equities, so diversifying within and amongst different asset classes is important. One way to diversify overall portfolio risk is to use alternative investments, which tend to have low correlations to these traditional asset classes.
Because markets are concerned with the sharp jump in bond yields, having lower duration exposure makes sense. However, we would not eliminate all duration in your portfolio. Furthermore, it is imperative to diversify the types of exposure within fixed income.
This report is created by Cetera Investment Management LLC
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