Investment Insights: Excerpts from our November report

Wade Balliet
Posted by Wade Balliet
Investment Strategy

The following are excerpts from the November 2016 “Investment Insights” report, produced by the Global Investment Management team. For the full report, click here.

Market strategy: Yellen’s redemption

Facade of the Royal Exchange in UK on a sunny day with people enjoying the plaza in front of it.Central banks continue to be the major driver for most price trends within financial markets. The Federal Reserve’s most recent rhetoric combined with an attempt to save face has made the timing for a rate hike in December quite clear. Across the pond the European Central Bank (ECB) continues to be trending in the opposite direction as growth in the Eurozone moves a bit higher, but not enough to dissuade ECB President Draghi from tightening or even shutting down their asset purchase program. Writers and readers alike will just have to hold off a bit longer before a resurgence of “tapering” is inserted into our economic vocabularies once again.

Equities: Shake it off

Major equity markets traded mostly sideways during the month of October with developed market equities leading losses. Domestic stock markets fell 1.82% for the month as uncertainty built leading up to the domestic election, while international developed markets fell a bit over 2% as evidenced by the S&P 500 and the MSCI EAFE Index. However, the “shake your head” asset class of the year, emerging markets, gained 0.25% for the month before falling in early November, according to MSCI data. Before the downdraft, the asset class, as represented by the MSCI Emerging Market Index, was up 16.58% for the year as commodity prices recovered modestly and monetary policy in the developed world was stagnant.

U.S. corporations have had a bit of a rough patch for the past six quarters, and just because the market is trading positive since the election doesn’t mean that the prospect for increased earnings per share growth is any clearer. We expect that some policies should benefit U.S. corporations, but some byproducts of others could actually end up hurting them. An example: Proposed corporate tax cuts should be a benefit overall; however, forecasted protectionist policies would likely buoy the U.S. dollar and consequently put a damper on profits from overseas revenues.

Fixed income: What goes up doesn’t always come down

Some of us may remember the times of yesteryear when the 10-year Treasury yield almost reached a high of 16% back in 1981 before starting a decades-long decline to the levels we see today – levels that pale in comparison. While the gauge has not been above 2% since January this year, some investors have speculated that the ultra-low levels and the recent trend upward may mark the end of a 35-year bull run in bonds. We may not completely disagree. As expected, the long-term decline in yields has roughly coincided with the fed funds rate over the period. While many other factors are involved, it is a known indication that rising rates from the Fed will very likely correlate with higher yields. We will need to closely monitor data and monetary policy to decode if bond yields will stay range-bound or begin to take off. Has the stampeding bull transformed into a hibernating bear?

Read more of the “Investment Insights” report from November 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. 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 does not ensure a profit or guarantee against loss.

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