Investment Insights: Powell hawks, Trump balks

Wade Balliet
Posted by Wade Balliet
Investment Strategy

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

Large plaza in North Korea with ceremonial flags, no people.Stock markets were fairly ho-hum on Tuesday despite a historic meeting between President Trump and North Korean leader Kim Jong-un, and some substantial regulatory news for AT&T.

The S&P meandered slightly higher, gaining 0.18% during trading yesterday after a deal almost two years in the making may finally be coming to a close. U.S. District Judge Richard Leon shot down the Justice Department’s request to block AT&T’s proposed acquisition of Time Warner in an $85 billion deal that will likely be the largest in recent memory. While the news in corporate actions may have been positive, investors are likely more focused on the Fed’s meeting this week.

Jerome Powell and the rest of the Federal Reserve governors concluded their June meeting today and, as expected, raised rates for the second time this year; the target federal funds rate rose a quarter of a point to 2.0%. The move was no surprise to investors and economists, as the Fed has been clearly conveying that a further normalization in rates would occur this year; the S&P declined 0.40%, while the 10-year Treasury yield jumped to almost 3%. Based on Bloomberg’s data of fed funds futures, investors had chalked up a 100% chance of a rate hike at this meeting. However, that certainty falls much lower on whether the Fed will raise rates once more or twice more in 2018. For now, it looks like the Federal Reserve and the markets expect a total of four rate hikes this year. The Fed will be keeping a close eye on its preferred economic gauges, but most of the conversation will likely surround wage growth and inflation.

For the first time ever, the sitting heads of the U.S. and North Korea met in person to discuss the future of their diplomatic relations. President Trump and Kim Jong-un met in Singapore yesterday in a summit that seems to have gone much better than many expected. In a surprising compromise, both leaders came to a written agreement that includes: new relations between the two countries, building lasting peace, North Korea committing to complete denuclearization, recovering POW remains, and the cessation of U.S. war games near the Korean Peninsula, among other items. While this compromise is a historic event for U.S. and international diplomacy, Trump’s stance on America’s closest allies may be a much larger issue.

Tensions were high, to say the least, at the G7 summit that took place just a few days ago as Trump suggested Russia rejoin the G7 – Russia was suspended in 2014 for invading Ukraine and annexing Crimea – and attacked Canadian Prime Minister Justin Trudeau on Twitter over the possibility of retaliatory tariffs between the U.S. and Canada. The new steel and aluminum tariffs were a main issue of discussion for the group, which ended in disagreement when Trump refused a joint communique that endorses “free, fair, and mutually beneficial trade” and fights against protectionism.

Our team believes the slight overweight to equities in our strategies is still warranted in the current environment; however, we are reviewing the possibility of capturing some of the gains we have seen in international stocks and reallocating to select bond sectors. Geopolitics continues to be a key risk across the globe even as dangers from North Korea and Italy’s potential exit from the euro have seemed to subside, but we continue to expect moderated gains in stocks. Progress in international trade, particularly between the major industrialized nations, will be an important item to watch for along with any change in outlook from the Fed.

Chart showing various market returns as of 6/12/18

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.

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.


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