Investment Insights: The Bermuda shuffle
This weekly report presents insights from our Global Investment Management team.
Meteorology and weather forecasting has been the dominant headline over the last month as Hurricanes Harvey and Irma swept across the Gulf, and a substantial earthquake struck off the coast of Mexico. As we reported in our last weekly insights piece, storms like these are devastating for families, communities, and regional economies, but a little luck along with the resolve of U.S. citizens makes for a more transitory event than many had anticipated.
With that said, these storms could have been far worse if it weren’t for a weather pattern over a region near Bermuda. Known as the Bermuda High, or the Azores High, it is defined by the National Weather Service as “a semi-permanent subtropical area of high pressure in the North Atlantic Ocean off the East Coast of North America that migrates east and west with varying central pressure.” This previously little-known pattern was just enough to push Irma approximately 20 miles and change the entire scope of the potential devastation and economic damage. Without that nudge, some forecasts estimated that over $200 billion worth of damage could have occurred – estimates have now been reduced to approximately $50 billion, according to Enki Research. While this will still be considered a sizable disaster set to rival Hurricane Andrew on an inflation-adjusted basis, it ultimately could have been much worse.
This means that due to the jostle from Bermuda, these storms shouldn’t knock the economy and consequently the Fed off of its path. Markets recovered mightily in the wake of this news with the S&P 500 Index jumping over 1% on Monday as Hurricane Irma weakened and GDP disruption eased. With the dissipation of most of the storm risk, the case for safe-haven assets has lost some steam in the current environment. The United States economy as well as the global economy continues to show optimism that the recovery can continue for the foreseeable future – led primarily by resurgence in the international markets as evidenced by the over 2% advance of the MSCI EAFE Index so far this month.
Economic fundamentals still feel pretty good, international markets, particularly in Europe, are accelerating – European markets have gained more in September than the U.S., broad international developed, and emerging markets, according to MSCI data – and lifting global GDP expectations, and inflation is relatively contained but close to targeted levels. We believe that long-term bonds yields are at risk for an increase and our strategies remain lower than benchmark duration. Our team is evaluating further shifting bond exposures away from the traditional Treasury markets and into spread products as expectations rise for a widening further along the curve. Meanwhile, stock markets continue to trade at record high levels as we approach the September Fed meeting, where Yellen will likely officially unveil their unwinding plan, and Congressional deadlines loom. Our team remains mildly cautious as we monitor for catalysts that could add another bout of volatility back into the market.
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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