The following are excerpts from the most recent monthly “Investment Insights” report, produced by the Global Investment Management team. For the full report, click here.
Market strategy: (Theresa) May gray and June gloom
Both stock and bond markets pushed stubbornly higher in May even as adverse political news in the U.S. and the U.K. dominated headlines. Global stock markets climbed ever-higher during the month, gaining 2.28% according to the MSCI ACWI Index, as economic data reinforced optimism and investors saw a dip in the market as a buying opportunity. Turmoil hit markets in the middle of the month as political events roiled the Trump administration.
The ongoing probe into the Trump team’s ties with Russian officials during the election and onwards have been widely publicized alongside the testimony of James Comey, ex-head of the FBI, and sitting U.S. Attorney General, Jeff Sessions. Investors may have seen this as a threat to the Trump rally and the president’s pro-growth agenda as global stocks tumbled almost 1.50% before recovering in the latter part of May.
U.K. Prime Minister Theresa May faced a spectacular backfire after calling for a snap election in early June. An election was not due until 2020, but May organized the surprise election in an effort to boost her party’s majority in Parliament and strengthen her hand going into Brexit negotiations. That plan failed tremendously as the Conservative party lost their majority. The divorce deal between the U.K. and the EU was already incredibly complex, but this vote may have thrown yet another wrench in the works. Based on the stances of the U.K. and EU administrations, it looks like we are headed for a hard Brexit as both sides attempt to hardball discussions.
Equities: International stocks take the reins
U.S. stocks trailed international markets as the U.S. administration came under fire and investors began to question if Trump would be able to follow through with his proposals. The S&P 500 Index gained 1.41% for the month while international developed stocks and emerging market stocks gained 3.76% and 2.97%, respectively, according to MSCI data.
Although geopolitical risk continues to rise and fall due to new developments regarding Brexit and Eurozone elections, economic data has continued to show a long-awaited improvement in Europe. According to Eurostat, the EU grew by 2.4% from a year ago in the first quarter, unemployment has trended steadily downward, inflation hit 2% in April, and the European Commission’s Economic Sentiment indicator is at levels not seen since before the 2008 financial crisis. Even Japan, which has endured a stagnating economy for years, has seen some improvement due to ultra-accommodative policies; the MSCI Japan gained 2.14% compared to the MSCI Europe’s 1.65% in May.
Fixed income: All up to Yellen
The Federal Reserve will meet this week to decide whether economic data is strong enough to warrant a second hike for this year. Markets currently expect the Fed will raise the federal funds rate another quarter point this month with a third hike likely later this year. The timing of the third move will likely be dependent upon the unraveling of part of the Fed’s $4.5 trillion balance sheet starting next year. While a rotation from monetary policy to fiscal policy was expected for the U.S., it seems we have hit a snag. Markets seem to be sobering to the fact that some, if not all, of Trump’s proposed deals may not pass as promised. Investors are still anxiously awaiting the infrastructure spending bill and tax reform that could add substantial fuel to the economy. If the administration is unable to push these measures through a Congress dominated by their own political party, it may be up to Yellen and the Federal Reserve to keep their foot on the gas.
Click here to read more of the “Investment Insights” report from May 2017.
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. 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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