Investment Insights: On-again, off-again … swipe right already
This weekly report presents insights from our Global Investment Management team.
The U.S. government has once again thrown the world a curve ball by recently announcing that the North Korean summit is back on. Additionally, Italian risk was an on-again, off-again trade with the prospect of a government that would challenge the cooperative policies and fiscal tenets of the European Union.
The current populist plan laid out by Italian Prime Minister Giuseppe Conte spooked investors, weighing whether the regime will continue to honor their governmental obligations, and if it would remain within the eurozone. Geopolitical events continue to overshadow an expanding global economy that is likely starting to reach a peak, or at least a plateau. As we have noted before, recoveries don’t have a finish line like a normal footrace, but at some point in time the marathon runner that is our global economy and our equity market does run out of gas. Jackson Browne may have said it best, “Running on empty, running on, running blind, running on, running into the sun, but I’m running behind.”
That’s what investors and economists may have been humming over the last few months. The equity market seems to have been trying to catch up with outsized gain after outsized gain, and may be looking to reconcile future economic growth with current valuations. Since the Great Recession, those gains have been remarkable. The S&P 500 has increased 393.18% since the bottom in March 2009, the economy has seen positive growth for 16 quarters in a row, and that same equity market continues to post strong earnings results. The world economy has dropped global interest rates to the lowest levels ever seen, although Japan is looking at the rest of world and shrugging its shoulders, and regardless of how many statistics are quoted, the fact is we are in unchartered waters.
A leveling off in major stock markets while earnings continue to increase at a rapid rate has moved many markets closer to mean valuation levels. The blended forward price-earnings level of the S&P 500 is now at 16.63 versus a 30-year average of 15.75, according to Bloomberg data, while the price-to-sales ratio continues to be above its average over the same period. These valuation metrics are all on the back of global GDP expectations that show growth of 3.94% this year from the 3.76% expected growth in 2017, per the International Monetary Fund. When looking at forward curve data on Bloomberg, it seems the market is expecting longer term interest rates to stay moderately the same, but we should see a notable rise in shorter term rates.
The Global Investment Management team believes the overweight to equities in our strategies is appropriate at this time; historically, this is where equities hold value. Price levels on the S&P 500 have jogged in place, sorting through the mix of emotions within political and international headlines. The U.S. trade negotiations, the possible denuclearization of the Korean Peninsula, the Italian rigmarole, the increasing budget deficit, the polarization of developed nations, and the recent fluidity in fiat currency and cryptocurrency, have all coalesced into quite the maze for investors to navigate. As long as we stay on the current economic track, we will be overweight to stocks, but cautiously so for the next half of the year.
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.