Investment Insights: A calm in Korea, but not for stocks

Wade Balliet
Posted by Wade Balliet
Investment Strategy

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

Despite groundbreaking peace talks between North and South Korea, stocks continue to fluctuate on earnings news and the Fed’s meeting.

Guards in traditional garb marching in South Korea.The S&P 500 bounced up and down throughout April before ending the month 0.38% higher. Companies within the index continue to post outstanding earnings growth; since last quarter, sales have grown 9.26% and earnings have grown 23.77% based on the 342 companies that have reported so far. Corporate news continues to be at the forefront for investors. Sprint and T-Mobile finally agreed to a merger in an attempt to form a better competitor against the few remaining wireless carriers – the combined company would be worth $146 billion. However, antitrust regulators will be a major obstacle for the merger and investors seem dubious it will pass government review.

The Federal Reserve concluded its two-day meeting today and the U.S. dollar had already started to appreciate in anticipation of the Fed’s decision. The big news for Fed officials is that, after some time, their preferred gauge for inflation – personal consumption expenditures – has finally settled around their 2% target, while unemployment continues to meet and exceed expectations. Despite the improvement, the Fed held steady on rates. The market had chalked up just a 34% chance of the Fed increasing rates at the May meeting, according to fed fund futures data aggregated by Bloomberg. That doesn’t mean investors should count the Fed out for increasing rates over the next few months – the same data shows a 100% chance of a hike at their June 13 meeting. The markets will still be watching the outcome of this week’s meeting closely for any change in the Fed’s language or outlook for the economy.

News on trade wars and other geopolitical issues may be also be adding to broad optimism. After more than 50 years of a tenuous armistice, both North and South Korea have agreed to officially end the Korean War and declare peace within the year. President Trump took to Twitter in support of the talks and may be helping to soothe markets even more by postponing the decision on steel and aluminum tariffs for the European Union, Canada, and Mexico to June 1.

Our team believes the market is currently holding steady with the status quo as investors await a stronger catalyst to move one way or the other. We continue to view earnings as a strong support to stock prices; however, companies may disappoint investors if they are unable to keep up growth at such a strong trend. The Fed’s tightening policy is also a key concern as rates move higher across the curve. The Global Investment Management team is considering floating-rate bonds as an addition to our strategies, which we believe would perform well as rates continue to rise.

Chart showing various market returns as of 5/1/18

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.

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