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3 Risks Worrying the Market

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Global equities have moved back to lows investors saw earlier this year, with concerns over trade wars, inflation risks and technology stock weakness.

TRADE WARS ARE MOSTLY RHETORIC AT THIS POINT

We believe the announcement of steel and aluminum tariffs in March have proven to be just the first salvo, as subsequent tariff proposals have been issued by both the U.S. and China. The U.S. administration seems politically committed to this issue, but it remains to be seen how they may moderate their actions based on the negative stock market reaction. We believe that this increasing risk highlights the importance of a well-devised allocation to investment-grade fixed income to ride through this volatility.

THE INFLATION GENIE IS NOT YET OUT OF THE BOTTLE

In our opinion, the uptick in market volatility this year started with the hot January U.S. wage growth of 2.9%. Investors feared growing inflationary pressures and a more aggressive Federal Reserve. Since then, wage growth has moderated to 2.6% and core inflation, as measured by the Personal Consumer Expenditures index (PCE) — at 1.6% — remains well below the Fed’s target. Investor inflation expectations have also retreated. Absent more pronounced inflation pressures, recent cost increases may be transitory — and we believe a natural resources allocation may help investors with this risk.

Market Weakness charts

MARKET-LEADING TECHNOLOGY STOCKS HAVE BEEN UNDER PRESSURE

Certain high-profile technology stocks have been weak due to concerns over data privacy, problems with self-driving cars (which are a major driver of semiconductor demand) and restrictions on foreign investment. Meanwhile, the broad U.S. technology sector, as defined by the S&P 500® Technology Index performance from January 2, 2018 - April 6, 2018, has actually outperformed the broader S&P 500 Index by 4% during that same time horizon. We believe diversification across the whole sector and diversification outside of the U.S. (where technology stocks are a smaller share of the market) may help investors with this risk.


DEFINITIONS

Standard deviation is a statistical measurement; when applied to the annual rate of return of an investment, it sheds light on the historical volatility of that investment. The greater the standard deviation of a security, the greater the variance between each price and the mean, indicating a larger price range.

A moving average (MA) is a widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random price fluctuations. It is a trend-following, or lagging, indicator because it is based on past prices.

The "core" PCE price index is defined as personal consumption expenditures (PCE) prices excluding food and energy prices. The core PCE price index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends.


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