Investment Insights: Skeletons in the closet
This weekly report presents insights from our Global Investment Management team.
Spooky trick-or-treaters weren’t the only skeletons startling the public during Halloween week with a few emerging from the Trump campaign. Special counsel Robert Mueller, who heads the special investigation into Russia’s possible involvement in the 2016 U.S. presidential election, announced his first charges of indictment on Monday.
Through a plea deal and cooperation with a former advisor to Trump, Mueller has been able to expand the probe and has issued grand jury indictments against former Trump campaign chairman Paul Manafort as well as former Trump campaign official Rick Gates. As reported on throughout the year, geopolitics will continue to be a key factor in financial markets and the U.S. political climate within the White House and Congress remains fairly turbulent. After news broke regarding the indictments, the S&P 500 Index responded with a decline of 0.31% on Monday.
In other news from the White House, it is widely expected that President Trump will nominate Jerome Powell, a current member of the Fed’s governor board, as his pick for Fed Chair succeeding Janet Yellen when her term ends early next year. Powell was nominated to the Federal Reserve Board of Governors in 2012 by former President Barack Obama and was nominated once again in 2014. According to information from Reuters and the Federal Reserve, Powell has taken a fairly centrist approach to monetary policy in his votes for rates and only recently has had a more dovish tone based on the Fed’s September meeting. Powell’s views may closely resemble those of Yellen and could continue monetary policy on its current path – a welcomed message for financial markets. Based on Powell’s track record, confidence in the Fed may remain high.
While there are quite a few major changes happening in the political spectrum, people aren’t letting these events put a damper on festivities. According to the National Retail Federation, it is expected that over 179 million Americans will celebrate Halloween and spend around $9.1 billion on their costumes, parties, and other parts of the merriment. The data also noted this year would mark an all-time high since the association began tracking 12 years ago.
Our team has recently made changes to our strategies with the goal of capturing gains in certain positions and removing those exposures. In the equity portion of our strategies, we removed our overweight to stocks in China and our position in currency-hedged European stocks. Both these markets performed exceptionally well this year with the MSCI China gaining almost 50% and hedged Europe returning almost 24% compared to an unhedged return of around 12%, according to MSCI data. The proceeds were spread to our remaining allocations that cover broad international developed, broad emerging markets, and U.S. large cap stocks. In bonds our team reduced exposure to mortgage-backed securities, an area of the Fed’s unwinding plan, and increased exposure to investment-grade corporate bonds and foreign bonds. Additionally, we increased duration slightly in municipal bond strategies. We believe these adjustments will benefit our clients through capturing the run-up in select markets and improving the risk-return profile of our strategies.
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.