This weekly report presents insights from our Global Investment Management team.
The threat of war continues to be the main concern for markets as tensions ebb and flow between the U.S. and North Korea, but there is no shortage of other geopolitical uncertainties that are weighing on investors.
After announcing a plan to begin unwinding its balance sheet, Fed officials are now on tour giving a total of seven different speeches during an important week for economic data. The Fed’s stance so far seems to be more hawkish than markets expected, as evidenced by Fed Chair Yellen recently warning against tightening policy too gradually. The U.S. dollar jumped on the news and stocks dropped briefly on Tuesday; the S&P 500 Index churned close to the 2,500 level. The series of speeches may end up being the swansong for the current Federal Reserve board as there is a chance for high turnover in seats next year, which could steer monetary policy in a different direction than that of the present Fed.
The threat of turnover may also apply to Congress as approval ratings plummet and key issues like healthcare and tax reform linger with lawmakers in gridlock. The Graham-Cassidy bill, a last-ditch effort to repeal and replace Obamacare, seems to have failed to reach the Senate, according to information sourced by CNN. The bill was the most recent of numerous attempts to reform the Affordable Care Act put in place under the Obama administration and continues the trend of botched attempts for legislative reform. The White House disclosed that a new Republican tax plan will be unveiled on Wednesday. The framework is expected to reduce the corporate tax rate, particularly on pass-through businesses, lower the top individual income-tax rates, and increase the bottom tax bracket; however, that increase would be effectively offset by a higher standard deduction. According to Reuters, the lost revenue of these tax cuts would be funded by forecasted stronger economic growth and, therefore, higher tax revenue generation.
While the Fed has become increasingly aggressive towards tightening monetary policy, Japan continues to attempt to jolt its stagnant economy back to life. Japanese Prime Minister Shinzo Abe announced plans for a stimulus package worth ¥2 trillion, equivalent to around $18 billion, on Monday and also declared he will call a parliamentary snap election in October. Theresa May called a similar election in June of this year, which backfired spectacularly. However, the hope is the same – to secure a stronger position for their party in parliament. It has been difficult for leaders to have a clear understanding of their citizens. Even the recent German federal election did not go as planned. While Prime Minister Angela Merkel’s party did win the vote, they lost much of their majority in parliament, predominantly to the hard-right Alternative for Germany party.
Geopolitics continues to be a chief driver of market returns in the current environment. The Global Investment Management team believes these events reflect a potential, but substantial, shift in the course of the world economy and global trade. We remain steadfast in our strategies, holding a slight overweight to stocks and alternative assets, and an underweight to bonds. Based on elevated valuations and the increases in disparate risks and volatility, our team is closely evaluating the markets for opportunities to adjust our strategies.
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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