Investment Insights: Running in place

Wade Balliet
Posted by Wade Balliet
Investment Strategy

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

Rates are back on the march as the 10-year Treasury yield approaches the 3% mark for the fourth time this year.

Sideways closeup of electronic display of currencies with red arrows showing decreases.Pressure from the geopolitical spectrum – with the U.S. administration discussing more tariffs and the expectation of additional rate hikes from the Federal Reserve – seem to be leading long term yields on an upward path. Jobs data released on Friday also contributed to the rise, with data showing better-than-expected increases in payrolls despite the employment rate remaining at 3.9%. The release was also the final employment report prior to the Fed’s meeting at the end of this month. Fed funds futures data, aggregated by Bloomberg, show a 99% chance of a rate hike during the September 26 meeting.

Higher rates and a stronger U.S. dollar have exacerbated existing economic and financial troubles in emerging markets. While Turkey was most recently in the news for its deteriorating economic situation, other countries including Argentina and Indonesia have joined the fight to combat their own currency declines. Even mainstays of the emerging markets, the BRICS, have not been immune to the spreading rout. Brazil faces controversial elections as it remains in a tenuous economic state after finally crawling out of its worst recession in history back in 2017. During the second quarter, South Africa – another BRICS member – entered its first recession since 2009, according to Statistics South Africa. The growing concerns over developing countries have weighed on their stock markets. Based on MSCI data, emerging markets stocks entered a bear market last Thursday, after breaching the 20% loss threshold following a high in January. Our team has remained underweight to the asset class for some time, and had further downgraded our outlook for the country group as recently as August.

Trade relations between the U.S. and China may also add to developing markets turmoil. Currently, the U.S. has imposed $50 billion in tariffs, but has planned another $200 billion as well as threatening to tax the remaining approximately $250 billion in goods if certain demands are not met. According to a request published by the World Trade Organization, China will be appealing to the organization to impose $7 billion a year in sanctions over U.S. dumping duties. China’s stock markets plummeted further in June due to the trade disputes and have yet to recover.

As we have said in our recent commentaries, the Global Investment Management team continues to see increased risk in financial markets. A return to normal levels of U.S. earnings growth in the coming quarters as well as deterioration in some international markets may be a harbinger of the growing bifurcation in market performance. As part of our strategy, our team recently reduced exposure to select international equity markets and reinvested that capital into domestic equities. We believe there may still be some room to run for the markets, but err on the side of caution in the current environment.

Chart showing various market returns as of 9/11/18
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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