Investment Insights: Between a rock and a hard place

Posted by Wade Balliet
Investment Strategy

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

Black silhouettes of several male and female executives at a meeting table under a blue global map.The S&P 500 Index sank 1.23% during trading hours Tuesday, the first daily decline of over 1% since October 11th last year. Markets seem to be reassessing near-term risks as oil slumps and the U.S. dollar continues a precipitous decline that started just over a week ago. Hurdles on the legislative side are also starting to appear. The American Health Care Act may be met with some opposition when it heads to the House floor tomorrow – which also happens to be the seven-year anniversary of the signing of the Affordable Care Act. Health care stocks, as a section of the overall S&P 500 Index, rose in the days after the unveiling of the bill on March 6th before falling 2.40% since mid-month.

Finance officials from the world’s largest economies met in Germany over the weekend to discuss policy issues. G20 finance ministers and central bank governors were unable to reach a compromise with the new U.S. administration and broke a decade-old tradition of endorsing open trade. The group also removed a statement that pledged to finance the fight against climate change amid growing disagreement from multiple countries. Despite being fresh to the job, U.S. Treasury Secretary Steve Mnuchin is believed to have accurately represented President Trump’s and the new administration’s desired policies. While it is not crystal clear what potential trade restrictions are in the works, other leaders seem to be hopeful that the upcoming G20 meeting in July will be more productive on trade issues.

The biggest divorce in recent history is finally underway. Prime Minister Theresa May will officially trigger Article 50 on March 29th, and thereby begin the formal two-year process of the U.K. leaving the European Union. The EU will likely take a hard stance in negotiations, principally in an effort to discourage other members from leaving the union; talks are slated to begin one month after the notification. While the U.K. economy has surprisingly strengthened since the Brexit referendum vote last year, details of the negotiations and what will be asked of the U.K. will likely have major impacts on growth. With the expectation of harsh penalties and side effects including decreased exports to the rest of the EU, we may see a fall in the British pound to compensate.

We believe the key risk in the market remains policy uncertainty. A disappointment in U.S. fiscal stimulus, international trade agreements, Brexit negotiations, or unexpected outcomes to European elections could lead to bouts of volatility. Our strategies continue to hold a slight overweight to stocks and an underweight to bonds based on valuations. We believe corporate earnings growth needs to be attained to support the current levels of valuation in U.S. stocks, while the possibility for rising long-term interest rates weakens the return potential for bonds. We consider the recent downward trend in the U.S. dollar to be temporary. There is a strong case for a rising dollar and that translates into a headwind for many assets abroad.

Chart showing market returns as of 3/21/17

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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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