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Ever Heard this Financial Advice Before?

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The global financial markets are a hive of activity for traders, speculators, and investors. There is a myriad of underlying assets to invest in, including the main asset categories, stocks, bonds, indices, commodities, cryptocurrencies, futures, et al. As a rule, when equities markets are performing poorly, safe-haven assets such as gold and bonds tend to flourish. Consider the current performance of equities markets as a case in point. February 2018 marked a dramatic correction in equities markets. From December highs, global markets shed thousands of points, and lost trillions of dollars in value. The 52-week trading range (lows and highs) of the world’s major bourses include the following figures as at Tuesday, February 13, 2018:

  • The Dow Jones Industrial Average – 20,204.76 and 26,616.71 with a year to date return of -0.17%
  • The S&P 500 Index – 2,311.10 and 2,872.87 with a year to date return of -0.15%
  • The NASDAQ Composite Index – 5,717.42 and 7,505.77 with a year to date return of 1.29%
  • The EuroStoxx50 PR – 3,264.84 and 3,708.82 with a -3.87% year to date return
  • The FTSE 100 Index – 7,073.03 and 7,792.56 with a -6.64% year to date return
  • The DAX – 11,645.13 and 13,596.89 with a -4.91% year to date return
  • The CAC 40 Index – 4,806.49 and 5,567.03 with a -3.25% year to date return

The whipsaw performance of equities markets has been attributed to fears of quantitative tightening by way of interest rate hikes in the markets. Speculators are concerned that rising inflation may lead to a cash crunch with listed companies with higher interest rates eating up more profits and preventing households from spending as much on the goods and services of listed companies. However, many of those fears have abated somewhat as value-driven investments in equities are now taking root.

Daily market updates are an integral component of understanding the mechanics of the markets. Wilkins Finance trading expert, Montgomery Blythe encourages clients to religiously follow the economic indicators to gain a better understanding of market fundamentals. For the most part, it is safe to assume that economic theory forms the bedrock of practical trading activity. In other words, you buy on the dip to enjoy value-driven investments such as what happened in early February 2018. According to the latest economic indicators and probability charts from the CME Group FedWatch tool, there is a 77.5% likelihood of interest rates rising by 25-basis points at the next meeting of the Fed FOMC on March 21, 2018. If this takes place, the Federal Funds Rate will rise in the region of 1.50% – 1.75%.

Rate Hikes and Financial Markets: Watch Them Closely

It is important to understand what drives monetary policy. For those of you who have cash in the bank, or high outstanding credit card balances, pay close attention. The monetary authorities have 2 overarching objectives at all times: stable prices and full employment. Currently, the US economy is enjoying high levels of employment (and low unemployment at just 4.1%), but prices are steadily rising.

This is concerning to financial markets. Given that US household debt is hovering around $13 trillion, it makes sense that households would be concerned about an additional 25-basis point rate hike. The extra monthly payments will go towards paying down interest and not the principal on outstanding loans and mortgages (variable mortgage rates only). Stock markets do not take kindly to a strong trend of interest rate hikes. A once-off interest rate hike can typically be ignored with stock markets, but this is hardly the case with the Fed.

What Asset Categories Are Safe at This Time?

The best approach to adopt whenever you are concerned about financial markets is an eclectic one. Diversify your financial portfolio as best you can to ensure that when one component of it plunges, the other can prop it up and stabilize it. For example, if you have a portfolio comprising domestic and foreign shares only, try diversifying into other asset categories such as gold which acts as a hedge against stock market volatility. The precise balance will vary from one trader to the next.

However, it is relatively safe to assume that you can stabilize your assets by having a mix of gold, ETFs, equities, real estate, derivative trading instruments, and possibly a fractional holding of cryptocurrencies. Your appetite for risk will determine how you spread your assets across each category. Remember to follow the economic indicators on a daily basis, set stop losses on your trades, and don’t become emotionally involved in the financial markets. Your goal is to optimize your portfolio’s performance, not simply to simply hold Apple, Google, Visa, MasterCard, Bank of America or other shares indefinitely.