This weekly report presents insights from our Global Investment Management team.
Just like riders at a rodeo, some investors have opted to try another go-around on the bull market – for as long as it may last. The S&P 500 Index extended gains and set yet another record high of 2,578 in intraday trading earlier this week; the gauge is now up over 16% year-to-date and is starting to close the gap with international stocks. Domestic corporate earnings, helped by a weakening U.S. dollar, are showing promise as announcements display similar trends to the last few quarters of strong earnings and low, but improving, sales. The earnings growth is evidenced by reports from 3M and Caterpillar, two global industrial stalwarts, which showed strong revenue and bottom-line growth that beat even the more optimistic estimates. A recent surge of improving economic data alongside potential progress on tax reform may have investors buckling up their spurs for the next leg of the market.
A critical juncture was cleared last week when the Senate approved a $4 trillion budget measure, avoiding the now typical legislative stalemate at the deadline. The bill, which passed 51-to-49, has opened doors for Republicans as they may no longer need Democratic support in the Senate due to a technical reconciliation amendment included in the measure, according to Reuters. The Trump administration seems to have set a hard deadline for passing tax reform by the end of the year, and it may very well happen. Meanwhile, President Trump has also been interviewing candidates for the position of Fed Chair and has told reporters he is “very, very close” to a decision. However, a new Fed Chair with opposing views to the current plan for monetary policy may produce a spike in volatility and could alter the path for rates.
After calling a snap election in Japan, Prime Minister Shinzo Abe achieved a commanding win for his party in parliamentary elections over the weekend. The vote of confidence may put Japan on the path to amending its post-war pacifist constitution, particularly due to the recent increase in hostilities with North Korea, according to BBC. However, things aren’t going as well for a different leader. U.K. Prime Minister Theresa May has again reached a roadblock in Brexit negotiations despite giving in to certain demands including honoring financial commitments of €20 billion, which EU negotiators are now saying may be too low. May also signaled the U.K. may use Brexit as a part of a wider trade pact, which would give companies much less time to prepare for the exit and may provide a more widespread shock. While it’s still early, this shouldn’t be enough to dislocate our projections for the equity markets – we continue to hold an overweight to the region within our equity portfolio.
Our team maintains a cautiously optimistic view of the financial markets. While we see risks continuing to rise, there is not a clear indication of a catalyst that would derail the current market climb, or global economic growth. That said, our strategies continue to be slightly overweight to stocks and alternatives, and underweight bonds. We continue to be wary of geopolitical risk and rising valuations, but that trend may continue for some time. Investors should be asking: when will this bull buck?
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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