The Dow Jones Industrial Average fell by about 1% while the S&P 500 was flat on the week. Tariffs on Chinese imports that were approved by the Trump administration put a damper on investor sentiment. Additionally, the Federal Reserve was also a source of volatility as stocks dropped following its second short-term interest rate hike in 2018. We expect the focus on interest rates and trade negotiations to drive volatility for the remainder of the year, so investors should prepare by rebalancing their portfolios to the mix of stocks and bonds based on their comfort with risk and long-term financial goals.
Putting Your Excess Cash to Work
The Federal Reserve (Fed) raised the target range for its federal funds rate for the seventh time in the current expansion last week, making the new range 1.75%-2.00%. The Fed expressed its favorable view on the economy, noting that solid gains in employment, household spending, and business investment could continue. The Fed also noted that core inflation (which excludes volatile food and energy prices) has increased in recent months but remains close to its long-term target of 2.0%. The Fed stated that it sees the economy evolving in a manner that warrants further gradual increases to the fed funds rate. In particular, the Fed's committee members expect two more short-term interest rate increases in 2018 and three more in 2019.
The recent rise in interest rates may provide an opportunity for your excess cash. While the Federal Reserve has hiked short-term rates, intermediate- and long-term rates haven’t risen as much. In fact, the difference between short- and long-term rates is relatively small, historically speaking, which makes short-term fixed-income investments (those with maturities of up to five years) more attractive, in our view. Whether they’re individual bonds or CDs, we recommend that short-term fixed-income investments represent 30% to 40% of your overall fixed-income investments because they are less sensitive to rising interest rates.
This begs the question – Are you holding too much cash? To help determine the role of cash in your financial life and how much you should have, we like to use the acronym USES:
So while you’ll want to ensure you have enough cash to cover each of your USES areas, you’ll also want to focus on the growth necessary to help achieve your goals. As we noted earlier, there may be opportunities, particularly with the rise in short-term interest rates, to invest your excess cash.
When inflation and interest rates start to rise from low levels, stocks can also continue to benefit from better economic and earnings growth. But don’t let rising rates keep you from owning investment-grade bonds – they can still help reduce swings in the value of your portfolio when stocks drop because they tend to decline less or even rise. Higher rates make bonds more attractive for current income, too.
|Dow Jones Industrial Average||25,090||-0.9%||1.5%|
|S&P 500 Index||2,779||0.0%||4.0%|
|10-yr Treasury Yield||2.92%||-0.03%||0.52%|
Source: Bloomberg, 06/15/18. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results.
The Week AheadHousing data will be in focus next week, with housing starts Tuesday, existing home sales Wednesday, and the FHFA home price index Thursday.
The Weekly Market Update is published every Friday, after U.S. markets close.
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