Investment Insights: So the joke starts like this…

Wade Balliet
Posted by Wade Balliet
Investment Strategy

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

Young man (seen from side/rear view) looking at two large computer monitors showing various market data tables.Janet Yellen walks into her office on Tuesday after a relaxing, long Labor Day weekend and begins to read the papers on her desk. After calmly perusing the documents for a few moments, she suddenly springs out of her chair and flips her sturdy oak desk, all the while turning a deeper and deeper shade of red – her staff knows that Janet is about to put the yell back in Yellen!

Or at least that’s the way we imagined it happening. While it may sound like a geeky economics joke with a poor punchline, the unfortunate reality is that after preparing the markets for an upcoming rate hike, economic data has already begun to slump again. Cue the fist-shaking at the sky.

A weak payroll number last Friday was followed by Tuesday’s report of markedly anemic expansion in U.S. services, according to Institute for Supply Management data; the institute’s Non-Manufacturing Index fell to a reading of 51.4 versus an expectation of 54.9 for July, its lowest point since 2010. Accordingly, the market has again discounted the probability of a September hike. Fed funds futures had pegged the probability of a September move at 36% last Wednesday, which has dropped noticeably to 20% as of today, based on Bloomberg data. The Fed has reiterated they will stay data-dependent, but it looks like the data isn’t quite there.

Fed futures probability wasn’t the only thing to slide lower on the disappointing numbers. According to Bloomberg, the U.S. dollar, versus a basket of currencies, fell 1.07% on Tuesday – a relatively steep move for the currency – on news that rates may stay lower for longer. A sinking dollar is typically a boon for commodities, including oil. Crude fluctuated based on announcements that Russia was seeking deals with OPEC to freeze production, while simultaneously initiating energy sector cooperation with Japan. Financial markets are still moving sideways as investors await data or news substantial enough to show whether stock prices will continue higher, or if they will price in a more lackluster growth outlook.

All of this has left our overarching theme unchanged. Our strategies employ a slight overweight to stocks, neutral positioning on alternative assets such as commodities, and a moderate underweight to bonds. We reiterate that our allocation remains proactive and at a relatively more defensive position than in recent years. While we remain cautiously optimistic on the global growth picture, we believe key risks remain.

Chart showing various market returns for 2016

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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