Investment Insights: Walking the tightrope

Wade Balliet
Posted by Wade Balliet
Investment Strategy

This weekly report presents insights from our Global Investment Management team.

Man on a tightrope over a grassy field at sunset.It feels like summer is winding down as we approach Labor Day weekend, despite the fact the summer season doesn’t officially end until September 22, but economic news seems to be doing quite the opposite. This week will be an important one for policymakers as some crucial data is released on U.S. jobless claims, wages, consumption, and manufacturing that will all be closely scrutinized. A recent analysis from Bank of the West Economics also revealed that while the overall U.S. economy is seemingly at or near full employment, state-specific data may vary widely with certain states like Wyoming and North Dakota feeling the brunt of worsening job growth and pay, citing the Federal Reserve Economic Database. While some states appear to be improving and others are deteriorating, the Fed must make the decision of whether the domestic economy as a whole is ready for higher borrowing costs.

The annual meeting of global monetary policymakers at Jackson Hole, Wyoming, concluded on Friday with a little more hawkish talk than expected. Based on Fed Chair Yellen’s comments, the Fed has growing conviction in a rate hike this year, sourcing employment data and the prospect for growth and rising inflation. Fed funds futures imply the probability of a rate hike is 36% at the Fed’s September meeting and 59% in December, according to Bloomberg. The Fed has missed its inflation target for more than four years, and monetary policy tools seem to be losing efficacy.

Financial markets continue to float undecidedly at current levels while trying to digest announcements from central banks and how the global economy is actually faring. The S&P 500 Index has hovered above the 2,150 level for over a month, as investors await a catalyst that will lead to a surge in selling or buying. That market complacency is reflected in the CBOE SPX Volatility Index, a measure of options volatility in the S&P 500 Index, which is at one of its lowest points since 2007. The 10-year Treasury has also fluctuated in a tight band over the last month as policymakers deliberate over when action should be taken. Wait-and-see seems to be the name of the game for the markets.

We don’t exactly agree with the “wait and see” approach. While we have shifted our asset allocation over the past few months to a slight overweight to equities and increased allocation to alternatives, the Global Investment Management team continues to proactively evaluate our strategies. We believe our existing exposure to developed market stocks and investment grade bonds is prudent in the current environment. The ostensibly ever-rising prospects of a rate hike from the Fed in the coming months likely warrant additional changes in allocation.

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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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