The week was relatively quiet, with a steady decline early in the week giving way to a strong showing in the market on Friday. Recently the same three concerns have plagued markets: trade-wars, inflation, and qualms that corporate earnings have peaked. The Fed on Wednesday held interest rates unchanged at the close of its meeting but acknowledged accelerating inflation and strong hiring. US Stocks dipped as a result.
First-quarter earnings season is shaping up to be a strong one. More than half of companies in the S&P 500 have reported results and
about 80% of those topped analyst expectations
. Yet, this hasn’t done much to lift stock prices as the S&P 500 is essentially flat this year. This is likely because the market already built these earnings into stock prices (investors essentially paid in advance for this).
One Person’s Risk is Another’s Opportunity
When thinking about investments, we tend to think about them in terms of performance and risk. However, what is risk? Largely, in the investment industry, professionals use return volatility to explain risk. In other words, how consistent are the monthly or quarterly returns for a particular investment or asset class. A “high-risk” portfolio often is characterized with more stocks, fewer bonds, higher expected returns, and higher volatility. A “low-risk” portfolio is characterized as the opposite. But is this always true? Yes, treasury bonds have never had anything like the S&P 500’s 20% one-day loss in October 1987 – but bonds aren’t always a safe bet either. History shows that government bonds (typically considered to be a safe and low-risk investment) “
have had losses almost as deep as stocks, and losses that lasted much longer.
On the other end, it is possible for bonds to perform extraordinarily well over long time frames. From August 1987, an investor that bought a 30-year Treasury Bond and rolled over into each new issue would have been ahead of stocks 25 years later in 2012.
Rather than attempting to select the right investments at the right time, one way to mitigate risk is to diversify your assets in a way that brings down your overall volatility while considering your goals and appetite for risk. Specifically, aim for an allocation with investments that tend to behave differently from one another, ultimately in a complimentary fashion. Additionally, if you invest in just one company or bond, you expose yourself to tremendous risk. If you properly diversify across companies and bonds or other types of investments, you will bring down your company-specific risk significantly.
Important Information: Diversification does not guarantee a profit or eliminate the risk of loss.
Emerging Markets May Falter
With rising interest rates, uncertainty related to global growth, and an overall rising dollar, emerging market investments,
often characterized as an area of higher risk
, are even more so as of late. Emerging markets are often defined as national economies that are advancing toward becoming a developed country.
Emerging market’s total dollar-denominated debt
has grown to a record $6.32 trillion
. With the rising cost of servicing dollar-denominated debt, we may see a slide of emerging market debt ratings. In fact, on Tuesday S&P cut Turkey’s sovereign-debt rating further into junk status. Additionally, currency weakness for emerging markets could send their inflation higher, as these countries will have to spend more of their currency to pay off the same amount of U.S. dollar denominated debt.
With rising U.S. rates, we will likely see a continued trend of investors taking their money out of emerging market assets to invest in safer investments like U.S. Treasuries.
Now is a good time to evaluate if your portfolio is overallocated to emerging markets.