Tariffs, Trade, and Technology Impact Market Uncertainty
U.S. and global markets pushed lower for the second consecutive month as uncertainty loomed around new tariffs on imports that were announced by President Trump targeting a broad group of countries including certain allies. The newly imposed tariffs caused concern of a trade war which put fear into the markets causing the increased volatility from February to continue.
Technology and Financials were two sectors that had large negative impacts on the markets throughout the month. The technology sector suffered from the backlash around Facebook, and their data privacy issues where Cambridge Analytics was harvesting private information of more than 50M Facebook users. Financials saw a pullback as yields on 10-year Treasurys dropped sharply lower.
The Federal Reserve announced they will be raising rates 25bps and consensus remains three rate hikes will occur in 2018. March also produced a stronger than expected jobs report and a low unemployment rate.
The yield curve flattened throughout the month as long-term rates decreased and short-term rates remained relatively flat. Credit spreads bounced around for a large portion of the month before tightening in the end as yields on risky bonds fell and investment-grade yields remained flat. The dollar finished the month slightly weaker against most major currencies and oil saw a minor uptick in price.
On the economic front, the advanced estimate of GDP was 2.9% which exceeded expectations. Headline inflation remained relatively flat at 1.8%. Employment gains increased above expectations. Consumer confidence decreased and came in below expectations.
Hedge funds posted negative results with the broad index down for the month. Seven of the eight strategies had negative returns with Distressed Restructuring and Event Driven leading the way down -5.77% and -2.16% respectively. Merger Arbitrage was the only positive performer returning 0.04%.1
Key Economic Data1
- The U.S. Bureau of Economic Analysis (BEA) released the “third” estimate of real gross domestic product (GDP) growth of 2.9% in the fourth quarter of 2017. Real GDP grew by 3.2% in the third quarter of 2017, 3.1% in the second quarter, and 1.2% in the first quarter of 2017.
- Headline inflation (U.S. Consumer Price Index for All Urban Consumers seasonally adjusted (CPI-U SA)) was up .2%. Core inflation (CPI-Ex Food and Energy) was 0.2%. For the last 12 months, the CPI-U NSA was 2.2% and the CPI-Ex Food and Energy was 1.8%.
- The U.S. Bureau of Labor Statistics (U.S. BLS) announced that non-farm jobs increased by 313,000 after increasing a revised 39,000 jobs in the prior month. Private sector payroll employment gained 287,000 jobs following a revised increase of 42,000 jobs in the prior month. The unemployment rate was 4.1%. The underemployment rate was 8.2%. The labor force participation rate was 63% last month.
- The U.S. Department of Housing and Urban Development (HUD) and the U.S. Census Bureau jointly announced that sales of new single-family houses were 618,000, a change of -0.6%. Housing starts were 1,236K, a change of -7.0%. Building permits were 1,298K units, a change of -5.7%. Existing home sales were 5.54 million units, a change of 3.0%.
- The Conference Board Consumer Confidence Index® was 127.7.
1. IndexIQ, FactSet, as of 3/31/18.
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All investments are subject to market risk, including possible loss of principal. Diversification cannot assure a profit or protect against loss in a declining market. Investors cannot invest directly in a benchmark.
A yield curve is a curve on a graph in which the yield of fixed-interest securities is plotted against the length of time they have to run to maturity.
A credit spread is the difference in yield between two bonds of similar maturity, but different credit quality.
Convertible arbitrage is a market-neutral investment strategy often employed by hedge funds that involves the simultaneous purchase of convertible securities and the short sale of the same issuer’s common stock.
Distressed/Restructuring strategies which employ an investment process focused on corporate fixed income instruments, primarily on corporate credit instruments of companies trading at significant discounts to their value at issuance or obliged (par value) at maturity as a result of either formal bankruptcy proceeding or financial market perception of near term proceedings.
A Global Macro strategy is a strategy that bases its holdings, such as long and short positions in various equity, fixed-income, currency, commodities, and futures markets, primarily on the overall economic and political views of various countries, or their macroeconomic principles.
Event Driven investing is designed to capture price movement generated by a significant pending corporate event, such as a merger, corporate restructuring, liquidation, bankruptcy, or reorganization.
Equity Hedge investing buys stocks that are undervalued and short sells stocks that are overvalued. This strategy may commonly employ variable exposure as well as the use of leverage.
Distressed securities are securities over companies or government entities that are experiencing financial or operational distress, default, or are under bankruptcy.
Relative-value arbitrage is an investment strategy that seeks to take advantage of price differentials between related financial instruments, such as stocks and bonds, by simultaneously buying and selling the different securities—thereby allowing investors to potentially profit from the “relative value” of the two securities.
The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.
HFRI Hedge Fund of Funds Index – Fund of Funds invest with multiple managers through funds or managed accounts. The strategy designs a diversified portfolio of managers with the objective of significantly lowering the risk (volatility) of investing with an individual manager. The Fund of Funds manager has discretion in choosing which strategies to invest in for the portfolio.
The S&P 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The U.S. Consumer Price Index (CPI) is a set of consumer price indices calculated by the U.S. Bureau of Labor Statistics (BLS). To be precise, the BLS routinely computes many different CPIs that are used for different purposes. Each is a time series measure of the price of consumer goods and services.
Consumer Price Index for All Urban Consumers (CPI-U) – A measure that examines the changes in the price of a basket of goods and services purchased by urban consumers.
The U.S. Consumer Confidence Index (CCI) is an indicator designed to measure consumer confidence, which is defined as the degree of optimism on the state of the economy that consumers are expressing through their activities of savings and spending.
VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking, is calculated from both calls and puts, and is a widely used measure of market risk, often referred to as the “investor fear gauge.”
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