Investment Insights: Back in the saddle again

Wade Balliet
Posted by Wade Balliet
Investment Strategy

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

Two construction workers in hardhats looking up at a partially finished highway bridge.Stock markets may be recovering from a week-long volatility bender after investors were startled by a notable rally in rates and some strengthening employment data.

The S&P 500 Index officially entered correction territory when it reached a peak-to-trough loss of 10.16% last week, but has since recouped some ground by gaining almost 5% in the last few days from the low on Friday. During the spike in volatility, the Dow Jones Industrial Average experienced its new first and second largest single-day point drops, but still never came close to its largest percentage declines. According to Lipper, a record $23.9 billion was withdrawn from U.S. stock funds last week, marking the largest on record since the start of data in 1992. While markets seem to have calmed themselves, one of the key culprits of the selloff remains at large. The 10-year Treasury yield took a breather from its upward march over the past week, but has continued higher, reaching 2.83% as of Tuesday.

The reprieve in stocks was partly due to technical factors, but some of the added stability may have also come from Congress. Lawmakers helped quell investor concerns by avoiding a government shutdown on Friday after passing yet another extension to federal funding, which will be voted on again on March 23, and may require further postponements as immigration policy has become enveloped within the budget talks. Another one of President Trump’s key economic campaign promises may soon come to fruition. An infrastructure plan was released by the White House on Monday and proposes $200 billion in federal spending over 10 years, which is designed to persuade states to raise their own money and potentially spark $1.5 trillion in new investment. The plan likely faces significant hurdles from Congress due to lack of funding details, but also may no longer be necessary to support economic growth. Investors, and possibly the Fed, are already concerned that the economy may be running at full capacity as evidenced by the continued strengthening in employment and wages. This fiscal stimulus package on top of the existing tax cuts may be too much and too late – pushing a full capacity economy into overheating, raising an already strained deficit, and forcing the Fed to rapidly tighten policy.

Our team hopes that the recent volatility hasn’t bucked too many investors off this bull market. Despite the pullback in both stocks and bonds, our strategies were positioned well, particularly as many of our alternative investments held stable or increased in value. These assets typically provide an important risk reduction when volatility increases in traditional markets. This has been a particular area of focus for our team as we have increased our allocations to these lower correlated assets while capturing gains in stocks over the past few years. Now that the dust has settled from the correction, we are more positive in our stance on stocks over the near-term. We believe the selloff was driven by technical factors, not fundamentals, and happened after an extended period of ultra-low volatility, which was an abrupt change for investors. If anything, we view this healthy correction as encouraging since it put the U.S. stock markets on firmer footing from a valuation and attractiveness perspective.

Chart showing market returns as of 4/13/18

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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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