Investment Insights: Tariffs and rate hikes galore

Wade Balliet
Posted by Wade Balliet
Investment Strategy

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

Foreign policy and monetary policy continue to be main drivers for the financial markets – and that makes for a fairly eventful week.

Shipping dock workers (2 men) standing next to piles of steel to be shipped.World leaders are meeting this week in New York for the U.N. General Assembly and have discussed crucial topics such as global trade and the Iran deal. The timing is newsworthy as the U.S. and China continue their trade spat with the most recent round of tariffs – including a $200 billion duty on Chinese goods, countered by a $60 billion tax on U.S. goods imported by China. While China cannot match the tit-for-tat increases, it seems to be eyeing other ways to fire back at the U.S. on trade. Today, China took another step in its battle with the U.S. by announcing it will cut import tariffs on non-U.S. goods, effectively pushing its behemoth consumer base away from U.S. products. Additionally, China could also limit exports of raw materials and goods that would restrict supply chains for U.S. companies.

Monetary policy is also firing up as the Fed leads the charge on higher rates. The Federal Open Market Committee concluded its two-day meeting today and, as expected, decided to lift its overnight rate another quarter point to 2.25%. Investors will be keeping a close eye on the newest dot plot, which shows the future expectation for rates by each Fed Governor. Until that release, our team continues to review fed funds futures, which currently show a 78% chance of another hike in December, followed by a 56% chance for one more in March 2019, according to Bloomberg data. The consistent and gradual increases from the Fed have provided transparency for the financial markets, but also underscore a strengthening view of the U.S. economy that is also supported by the rise in longer term government bond yields. The 10-year Treasury yield has climbed markedly in September, but declined to 3.05% today.

Global monetary policy lingers in the very accommodative zone, while U.S. policy continues to tighten. The European Central Bank left policy and rates unchanged at its meeting last week; and the Bank of England kept rates steady as well, but mentioned potential unwinding of its stimulus programs. This may become more pertinent, as some U.K. government officials call for another referendum on Britain’s inclusion within the EU over sluggish and stalled Brexit talks.

While domestic stock markets continue to rise and may even appear expensive, they retain some important advantages versus foreign stocks and bonds. U.S. bond yields are weathering rate increases from the Fed and continued improvement in the economy, but are also attempting to price in geopolitical issues. Our team remains cautious in the current environment and will monitor changes in monetary and international policy closely.

Chart showing various market returns as of 9/25/18

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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.

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