THE WEEK ON WALL STREET
Concerns over a firmer monetary policy by the Federal Reserve were heightened by fresh economic data, touching off a climb in bond yields and a slide in stock prices last week. The Dow Jones Industrial Average skidded 2.99%, while the S&P 500 dipped 2.67%. The Nasdaq Composite index sagged 3.33% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, retreated 1.23%.
FACT OF THE WEEK
After watching it utterly dominate the musical landscape of the late 1970s, the National Academy of Recording Arts and Sciences gave disco their stamp of approval, deciding to give a Grammy award for Best Disco Recording, just as the musical style was preparing to die. The first and final Grammy for Best Disco Recording was awarded on February 27, 1980, to Gloria Gaynor’s “I Will Survive.”
On a fundamental business level, there was growing disillusion within the record industry by early 1980 regarding disco’s profit potential. As popular as the music was on the radio and in the clubs, disco had failed to produce many of the kind of dependable, multi-platinum acts that the industry depended on for its biggest profits. It was also hard to ignore the obvious signs of the backlash in the popular culture of the time. One of 1979’s biggest acts, the Knack, was being marketed explicitly as the group that had come to destroy disco. At a Chicago White Sox game the previous July, tens of thousands of marauding disco-haters forced the cancellation and forfeit of a game at Comiskey Park on “Disco Sucks” promotion night. And then there was Ethel Merman’s disco version of “There’s No Business Like Show Business,” a sure sign of the coming apocalypse that the Academy chose to ignore.
The Best Disco Recording category, recognized by the Grammys for the first time on this day in 1980, was summarily eliminated from the following year’s awards.
MARKET MINUTE
Stocks Slide
Stocks struggled last week, buffeted by growing fears of further Fed tightening and disappointing forecasts from two major retailers that called into question the consumer's health. The release of the minutes from the Federal Open Market Committee’s (FOMC) last meeting did little to assuage investor worries. Reflecting these concerns of a more aggressive Fed was that by Thursday, traders were pricing in a 27% chance that the Fed might lift rates by a half-percentage point at its next meeting, far above the 1.3% chance just one month ago. Stocks took another leg lower on Friday following the release of January’s Personal Consumption Expenditures (PCE) price index, which showed hotter-than-expected price increases and more robust consumer spending.
FOMC Minutes
Minutes from the last FOMC meeting indicated that nearly all members agreed with February’s quarter-point rate increase, though some would have supported a 50 basis point rate hike to move quicker towards the Fed’s target range. While the minutes suggested another 25 basis point hike is likely at their next meeting, investors remain anxious that more recent economic data may prompt a 0.50% hike instead. The minutes stressed that inflation was still too high. However, members diverged on the economy, with some members finding the risk of recession elevated. In contrast, others feel the Fed may engineer a soft landing or avoid a recession altogether.
FINANCIAL STRATEGY OF THE WEEK
Whether it’s sports, music, or politics, life holds any number of “great debates”– debates that never seem to reach a conclusion. In investments, that great debate asks the question, “Active or Passive Investing: Which is Better?”
The fascinating aspect of this debate is that equally intelligent people can argue polar opposite positions, leaving the rest of us to wonder what the answer is, if one even exists.
Passive Pointers
The case for passive management is anchored in the evidence that the preponderance of money managers has failed consistently to beat their comparative index. This is true for two primary reasons: Markets are efficient and all known information is already reflected in the price of the stock, making it difficult for managers to find companies that are expected to outperform. The hurdle of an elevated expense ratio typical of actively managed mutual funds makes it hard to match or exceed a low-expense index fund.
Active Arguments
Active managers counter that while the markets may be generally efficient, there are windows of inefficiency created by the time it takes for information to properly reflect in a stock’s price. Active managers further argue that performance is not just about relative return, but also about managing risk. For instance, if an active manager can deliver a hypothetical 90 percent of the index return at 70 percent of its risk, then that constitutes a measure of outperformance.
Unlock the Combination
Ultimately, it’s a decision based on what you want to pursue. Do you prefer the approach taken by index funds or the strategy behind active management? For some, the combination of both funds represents an approach that takes no sides but seeks to tap into the distinctive benefits each offers. Mutual 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. Read it carefully before you invest or send money.
International investments carry additional risks, which include differences in financial reporting standards, currency exchange rates, political risk unique to a specific country, foreign taxes and regulations, and the potential for illiquid markets. These factors may result in greater share price volatility.
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