The Week on Wall Street
Heightened coronavirus fears, falling yields, and Super Tuesday primary results sent stocks on a rollercoaster ride of sharp price swings, leaving stocks marginally higher for the week.
FACT OF THE WEEK
What was the most important document published in 1776? Most Americans would likely say The Declaration of Independence. But many might reasonably argue that of Adam Smith's foundational work, The Wealth of Nations. First published March 9, 1776, Smith's work has had substantial influence and remains the most critical account of the rise of, and the principles behind, modern capitalism.
A Swift Fed Decision
Wednesday morning, the Federal Reserve lowered its short-term interest rate by 0.5% to a range of 1.00%-1.25%, making its most significant cut since 2008. Addressing the media, Fed Chairman Jerome Powell said that the move was to give the economy a "meaningful" lift and "help boost household and business confidence."
The question is whether reducing borrowing costs can effectively address growing business and consumer anxieties about shopping, traveling, and gathering.
A Push Toward Treasuries
The uncertainty on Wall Street has heightened demand for Treasury bonds. Their yields typically fall as their prices rise, and fall they did last week. The yield on the 10-year Treasury dipped under 0.70% during Friday's market day, an all-time low.
Winter Hiring Surge Continues
The Department of Labor's latest employment report data showed companies adding 273,000 net new hires last month. Net monthly payroll growth has averaged 243,000 since December.
The Fed's 50-basis-points cut in the federal funds rate has now shifted the sights of investors toward the European Central Bank's expected policy announcement on
March 12. The ECB has less room to maneuver than the Fed since its key interest rate currently stands at -0.5%.
Negative interest rates have done little to ft eurozone economies, which may necessitate more-creative monetary policy accommodation from the ECB's new president, Christine Lagarde.
Traders' current focus is also on whether the Federal Reserve will make another rate cut on March 18, when its next meeting concludes. The half-point rate cut this past week did little to soothe stock market concerns; opinions vary about what the central bank might choose to do next.
FINANCIAL STRATEGY OF THE WEEK
A LOOK AT DIVERSIFICATION
Diversification is an investment principle designed to manage risk; however, it does not guarantee against a loss. The key to diversification is to identify investments that may perform differently under various market conditions.
On one level, a diversified portfolio should diversify between asset classes, such as stocks, bonds, and cash alternatives. On another level, a diversified portfolio also should be diversified within asset classes, such as a diverse basket of stocks.
A Diversified Approach
For example, let’s say a stock portfolio included a computer company, a software developer, and an internet service provider. Although the portfolio has spread its risk among three companies, it may not be considered well diversified, as all the firms are connected to the technology industry. A portfolio that includes a computer company, a drug manufacturer, and an oil service firm, however, may be considered more diversified.
Similarly, a bond portfolio that invests exclusively in long-term U.S. Treasuries may have limited diversification. A bond fund that invests in short-term and long-term U.S. Treasuries, plus a variety of corporate bonds, may offer more diversification.
Mutual Funds and ETFs
The concept of diversification is one reason why mutual funds and Exchange Traded Funds (ETFs) are so popular among investors. Mutual funds accumulate a pool of money that is invested to pursue the objectives stated in the fund’s prospectus. The fund may have a narrow objective, such as the auto sector, or it may have a broader objective,
such as large-cap stocks.
ETFs also can have a small or more general investment objective. Keep in mind, though, the more narrow an investment objective, the more limited the diversification. Furthermore, a narrow investment objective may result in more volatility and additional risks associated with a particular industry or sector.
The concept of diversification is critical to understand when you are evaluating a portfolio. If you want more information on diversification or have questions about how your money
is invested, please call us to review your situation.
Mutual funds and exchange-traded funds are sold only by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Please read it carefully before you invest or send money. Shares, when redeemed, may be worth more or less than their original cost.