Investment Insights: Slow your roll

Wade Balliet
Posted by Wade Balliet
Investment Strategy

This weekly report presents insights from our Global Investment Management team.

View inside busy investment & trading office with several executives on the phone and looking at monitors.It seems as though the volatility the Bank of the West Global Investment Management team had been worried about has rolled into town, flattening everything in its path. Over the last week, the S&P 500 lost a little over a fourth of its year-to-date return, logging a 2.65% decline. In addition, the MSCI Emerging Market index lost over 4% and international developed markets, as represented by the MSCI EAFE Index, declined almost 3%. The U.S. Universal Bond Index declined approximately 1%, and commodities, shockingly, lost the least, down about half a percent. But is the roll the equivalent of a boulder rumbling down a mountain, or a mere speck of sand rolling down an ant hill?

If the volatility index, as prescribed by the VIX, were a predictive indicator, it would be telling us that the growing concerns are somewhere between the boulder and the speck of sand, an obvious answer given the two analogies. However, it’s an apt observation because the VIX index has stayed well below the 10-year average of 20.54, but is also a far cry from the doldrums over the past 3 months, which averaged 14.22. Volatility has been largely stymied while central banks provide historic amounts of stimulus, but the markets have started to call into question the ability of central banks to continue feeding the monetary monster – the result has been that most asset classes have felt the pain.

Fundamentally, not much has changed in the way of underlying economic metrics. We still are expecting slowing global growth, a muddle through from the Brexit, and central banks yearning for inflation and growth by almost any means necessary. As a result, most indices are seeing stretched valuations and companies are feeling pressure on profit margins in the United States, which have been under pressure from an uptick in wage inflation as well as the potential for a strengthening U.S. dollar. Optimistic investors continue to point to U.S. consumers as the major tailwind both domestically and globally.

The worry that markets have traded on over the past couple of days is the credibility of major central banks and the programs they have utilized to keep the money flowing, despite further sluggishness. The Fed’s campaign to hike rates this year could throw a wet blanket on equity and bond markets as well as provide concern throughout consumer spending categories, enough so to thwart the already fragile position of the current recovery.

Many of the risks discussed in the previous paragraphs were the reasons Bank of the West Global Investment Management called for a reduction in select asset classes over the summer. Complacency in the marketplace as stocks continued to grind higher has resulted in some pent-up volatility and trading, with the steam being let out over the past few trading sessions. We are still in favor of a moderate overweight to equities as we don’t believe that central banks will back off of the pedal just yet, with the exception of the Fed. It’s currently about a coin flip whether they will raise in December, but financial market reaction may be a key factor for Fed officials. Time will tell if the Fed raises and if the market can handle a rate increase, but expect possible volatility as each Fed date approaches – not to mention the election in November.

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Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

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