This weekly report presents insights from our Global Investment Management team.
On Tuesday, President Trump announced the U.S. will exit the Iran nuclear deal, a far-reaching decision that will affect political relations, financial markets, and world trade.
Major equity markets were largely unchanged by the end of the trading day, with the S&P down a marginal 0.03% after the announcement. The real market movement was happening in oil markets as WTI crude topped $71 per barrel this morning. This jump in price only adds to a quiet rally in crude oil that has occurred over the past 8 months predicated on continuing economic growth globally as well as recent signals from the Trump administration regarding the aforementioned pullout from the nuclear deal.
The major gainers from the withdrawal will be oil producers. Increased prices due to potential disruptions in oil supply as well as tensions in the Middle East should push oil prices higher. This will be increasingly beneficial for oil companies that have found ways to remain profitable or stymie losses even as oil touched below $43 per barrel as recently as June 2017. Indeed, with the resurgence in oil prices at the end of last year and the beginning of this year, energy companies have posted 99.75% earnings growth since the previous quarter and a 6.09% return since the beginning of the year, according to Bloomberg data.
The other dominos which could fall simultaneously center on the path of interest rates. Current Fed Chair Jerome Powell, along with his predecessor Janet Yellen, have proclaimed that the third less rigid mandate of the Fed is to ensure stability in financial markets. The strength of the economy continues to improve with the unemployment rate slipping below 4%, and as job openings and those that are unemployed are equalizing. However, this has been an interesting economic dynamic. Even as the labor market has improved, confidence remains high, and some wage inflation has been percolating in the market place; savings rates have increased and spending has begun to falter.
Many of these conditions have left some in a quandary. What should investors do with a combination of fundamental positives, mixed situations in geopolitics, and a record earnings season that has left stock markets flat? Case in point, Norwegian Cruise Lines surprised investors with earnings that were 10.91% higher than estimates, but the market rewarded it with a 3.40% decline on the day it announced. Realistically, the market might just be coming back to its senses after valuations became elevated with the price-earnings ratio breaching 23 earlier this year, compared to its 10-year average of 17.53.
For now, the future remains bright with some opportunity for gains in 2018. Nonsensical noise surrounding headlines should give way to positive equity gains and normalized yields. With little probability of recession in the United States over the near term, we continue to advocate for an overweight to equity exposure in our strategies followed closely by risk mitigating assets in the alternative asset class. As predicted, fixed income securities were a relatively volatile asset class during the first quarter. An over 20% jump in the yield of the 10-year Treasury has investors spooked – and for good reason. Just like the first quarter, bonds may end up being a more unpredictable asset than equities, so investors should take caution on being too short, or too long, both in duration as well as in memory.
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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