This weekly report presents insights from our Global Investment Management team.
A synchronized global recovery has been an encouraging theme over the last several years, but may now be ending.
Emerging markets economies continue to face strong headwinds as some enter recession, and others attempt to keep afloat. Developed markets seem to be much more buoyant and, for the most part, have yet to see any notable change in positive momentum. The S&P 500 has swayed around the 2,900 level since breaching it for the first time ever at the end of August. Tech stocks, which doubled the return of the S&P over the last five years, have begun to lag – over the last three months, tech was behind seven of the 11 major sectors within the S&P. While stock investors appear to be moving more toward defensives, bond investors aren’t getting the memo. The 10-year Treasury yield rose above 3 percent again on Monday.
The troubles in emerging markets have been brought to the fore over the last few months as issues in Turkey have worsened and South Africa has entered a recession. Policymakers have begun to take tougher action to shore up their economies. Argentina recently presented austerity measures to congress, and Venezuela has rolled out a new currency after its previous one was estimated to reach an annualized inflation rate of 1 million percent by the end of the year, according to the International Monetary Fund. Inflation of the new currency has already reached 100 percent. South Africa has shared details of its approved reform package that attempts to boost confidence in sectors such as mining, telecom, and transport.
On Tuesday, Mario Draghi, head of the European Central Bank, recommended eurozone countries put further supports in place for the region’s banking sector, and suggested a common insurance plan for bank deposits – which could underline potential concerns for the area. Conversely, Greece’s finance minister declared government plans to loosen capital controls and lift financial restrictions put in place during its debt crisis.
The economic gap between developed and emerging economies seems to be widening, and it may not bode well for global growth prospects. Escalation of trade disputes between the U.S. and China aren’t helping the matter, particularly after the last round of increases. This week, President Trump enacted a tax on another $200 billion in imports, and China has retaliated with a $60 billion tariff on American goods – likely due to a lack of capacity for a dollar-for-dollar rebuttal. Our team remains wary in the current investment environment. We continue to see mild opportunity for upside in stock markets, but risks continue to mount and are likely to overshadow any potential gains.
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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