Investment Insights: Into the gauntlet

Wade Balliet
Posted by Wade Balliet
Investment Strategy

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

The moment U.S. markets have been waiting for has arrived – or at least one of them.

Reflection of big-city skyline at night as seen on a screen showing stock market activity.The recent stock rally had been taking a week-long breather, with the S&P 500 Index fluctuating around the 2,360 level as investors awaited President Trump’s speech to Congress last night. Markets have been highly anticipating the address as an opportunity for the president to reveal details of his plans for deregulation, tax reform, trade policy, and infrastructure spending. But he may be on the hook to deliver more than the broad strokes of his proposals.

The “Trump trade” has been due to markets pricing in a very persuasive pro-growth agenda, particularly within infrastructure spending as a fiscal policy for growth. However, any legislative or political roadblocks – obstacles central banks do not deal with – may soon be flushed out along with the potential volatility that goes with it.

Another so-called market moment may be coming up sooner than expected. Dallas Fed President Robert Kaplan, a voting member of the FOMC, made further comments on impending rate hikes, declaring, “Sooner rather than later means in the near future.” Markets seem to have taken that short statement to heart along with similar comments from New York Fed President William Dudley. Implied fed funds probabilities from this morning showed an 82% chance that the Fed will raise rates at their March 15 meeting, rising from 44% just two weeks prior based on Bloomberg data. As labor data continues to strengthen and officials start to transform into inflation watchdogs, a tightening of policy seems to be a fast-growing probability over the very near future. While we continue to project two to three hikes this year, the timetable for those shifts seems to be moving forward.

Potential policy is also causing notable changes internationally. For the first time, China has overtaken the U.S. and France to become Germany’s largest trading partner, with imports and exports between the two countries rising to €170 billion in 2016, according to Federal Statistics Office figures reviewed by Reuters. This was an interesting development just after President Trump threatened to impose tariffs and a tense round of talks between the U.S. and Germany.

While not strictly due to policy, news from OPEC is looking promising for oil prices as the assembly holds fast to its production-cut promises. According to sources within OPEC and the oil industry that were speaking to Reuters, Gulf states are looking for oil prices to rise to around $60 per barrel this year. The group believes that level would allow for new field expansion for low-cost producers and simultaneously leave most U.S. shale production in uneconomical territory.

We reiterate that our stance remains slightly overweight to equities while slightly underweight in bonds and alternative investments. However, our strategy positioning is constantly under review. Markets will have to absorb imminent events here and abroad related to U.S. fiscal and monetary policy, European Union debt negotiations, Brexit proceedings, and the reoccurring data surrounding global growth. We believe our positioning is appropriate at this time, but opportunities for adjustment are just on the horizon.

Chart showing various market returns as of 2/28/17

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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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