Investment Insights: Geopolitical and weather patterns
This weekly report presents insights from our Global Investment Management team.
The devastation from Hurricane Harvey on both individuals as well as on national and state economies will take years to calculate and contend with. In addition to Harvey, category 5 storm Irma is making its way west through the Caribbean, with an expectation that it could work its way up Florida and the Eastern Seaboard and necessitate further clean-up and rebuilding of homes, cities, and entire communities. In fact, some forecasts have already been published for Harvey, with BCA Research estimating $30 billion worth of damage from Harvey. Although it may be shocking, this may be a conservative number and isn’t even in the top five predictions for severity of economic damage. Astoundingly, as we look to additional forecasts, Barclays reports that Irma will likely be the most costly storm in U.S. history.
With history as a guide, we know from previous hurricanes that they are generally transitory in nature, creating short-term volatility in financial markets that ultimately does not deter the trend of the macro economy or current policies. Although government divisions and response times will always come under scrutiny and criticism, the resolve of our country combined with the donations of private citizens and government-sponsored agencies dampens the long term economic repercussions of storms even as large as Harvey was and Irma could very well be.
This means that the Federal Reserve will more than likely continue on its path of increasingly restrictive monetary policy even as the probability of a December rate increase declines. Monetary policy is set today for the expectation of conditions 12 months or more in the future. A temporary unemployment or inflation spike is usually just that – temporary – with the trend holding a higher weight for decision-makers in the Federal Reserve. Speaking of the Federal government, perhaps one silver lining with the timing of these storms is the concurrent debt ceiling debate coinciding with the need for aid in Texas and – most likely – other Red states.
Concerns of a government shutdown due to the impending debt ceiling not being raised, combined with the need for resources in the affected states, should be the catalyst needed for both sides of the aisle to come together relatively quickly in an effort to avoid backlash – especially for the Republicans in both Texas and across the U.S.
Meanwhile, the political event much more likely to linger and affect market strategy isn’t the weather or the debt ceiling – it’s the international response to North Korea.
It is almost impossible to say what combination of diplomatic, economic, and military options may be required to end the impasse – but it is certain that any misstep leading to open conflict would likely explode into catastrophic proportions benefiting no one. Posturing will continue to occur, but the Chinese will likely hold the deciding vote as they are by far the largest trading partner with a North Korea that is running out of options, yet somehow fully committed to extending their efforts to create an intercontinental nuclear threat as far as possible.
This uncertainty will breed volatility as market participants weigh the risks and probabilities of the prospects of war. This too should eventually pass, with the key word being eventually. We see this event as a longer burn for equity investors to look through than those more transitory, generally because of the unpredictability of the key personalities involved. We wouldn’t be surprised if there are more days like yesterday – where the S&P 500 dropped 0.76% – that occur over the subsequent month(s), but for now we remain overweight stocks versus other macro asset classes. With trepidation in our tactical asset allocation strategies, we continue to be of the view that stocks offer the best value in the near term from an absolute return standpoint than other assets available, even as volatility rises.
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.