This weekly report presents insights from our Global Investment Management team.
Following a record-setting Black Friday weekend, the newly nominated Fed Chairman Jerome Powell presented an early holiday gift to the U.S. equity markets this week when he signaled that he would be moderate on interest rate policy and reticent to propose new financial regulations if he was confirmed.
Additionally, the Senate added to the excitement by passing a draft tax bill draft through committee that could possibly lead to a floor vote by the end of this week. This may be the year-end exuberance getting the best of an arguably fully-valued equity market, as there are many risks to contend with — besides the two dominating the most recent news headlines.
The first is a lingering topic that seems to grow in magnitude, or at least range, each time North Korea tests a ballistic missile. In the middle of the year, the GIM team had prophesized that although the hurricanes would be devastating and tragic, that these events should be seen as more transitory in nature and the real risk to a slumbering market would be the ongoing tension with North Korea. Early Wednesday in Japan, an intercontinental ballistic missile was launched off of the Korean Peninsula and entered the Sea of Japan after possibly reaching an altitude in excess of 2,500 miles. Speculation has surmised that at this altitude, if correctly aimed, the missile would have enough propulsion to reach the continental United States. The markets reacted mildly to the news, with the Japanese Nikkei Stock Index finishing the session down just 0.04 percent, and U.S. equity investors completely overlooking the news with the S&P 500 up 0.98 percent. The VIX Index, a measure of equity volatility, did perk up a bit — but it is still below the average reading for the year.
Additional geopolitical issues include a potential divorce invoice from the European Union to Britain. According to a report by The Telegraph, the U.K. and the EU may have come to an agreement to pay the EU between 45 billion to 55 billion euros. This sounds a bit more promising than previous reports regarding negotiations that had been gridlocked with neither party relenting on major terms of Britain’s exit. In response to Prime Minister Theresa May and European Commission President Jean-Claude Juncker’s meeting, the majority of European equity markets finished higher, between 0.50 to 1 percent, while the euro strengthened. Optimism in the economic picture as well as the dampening of some of these externalities has strengthened our resolve in our overweight in developed market equities such as Europe.
Domestically, although the tax bill seems to be on slightly better footing than some would have assumed at this point, there is now talk of a potential government shutdown with both sides posturing ahead of budget deal talks. Additional noise surrounding some state-specific political issues, infighting in Washington among party leaders, and a slew of soundbites from the administration still hasn’t deterred investors from continuing to pour capital into U.S equities as well as U.S. treasuries. The “look-through” market where investors see the news and essentially say “yeah, so what” continues to shake off many of the conditions that historically would have elicited volatility. While many of the economic fundamentals look sound, our team is carefully watching for the first signs of a potential correction or other harbingers of recessionary pressures. Potential triggers may arise from geopolitical hazards or from monetary or fiscal policy missteps, either here in the United States or internationally. In the meantime, as the year careens towards an action-packed conclusion, consumers are feeling pretty good with sentiment hitting a 17-year high and their investment accounts possibly seeing the same.
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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