Investment Insights: Between a rock and a hard exit
This weekly report presents insights from our Global Investment Management team.
Financial markets were trending higher again in the past few days as the U.S. and China close in on a trade deal and as technology stocks led gains.
However, yesterday’s vote by U.K. lawmakers has increased uncertainty over Brexit. Analyst ratings for Apple and an acquisition by chip maker Nvidia drove stock markets higher with the S&P 500 gaining 1.77% on Monday and Tuesday, driven by technology companies that returned 2.71%. Shares of Boeing have plunged over 10% this week following a second fatal crash involving its new 737 MAX 8 aircraft.
Countries around the world and the European Aviation Authority have rushed to ground flights, which had left the U.S. Federal Aviation Administration – typically the world’s most trusted organization for aviation safety – alone in its opinion that the model remains airworthy. This afternoon that judgment was reversed as President Trump announced the grounding of the Boeing jet model in the U.S.
After two years of negotiation, U.K. Prime Minister Theresa May suffered another thorough defeat in British Parliament late on Tuesday, as lawmakers voted down the new draft of her Brexit deal. Members of Parliament voted 391 to 242 to reject the terms of May’s agreement. This leaves the administration little time to resolve negotiations and plan their orderly exit by March 29, the deadline set by the original Brexit referendum.
A series of votes this week will provide direction to investors on how British Parliament wants to proceed, if at all, including a crucial vote this afternoon that rejected a no-deal exit under any circumstance. The U.K. government will now likely apply to the EU Council for an extension, which would happen at their meeting on March 21. We believe it to be in the best interests of both parties to agree on terms, though those terms continue to worsen for the U.K. despite a lower likelihood of a no-deal crash out of the union.
The U.K. isn’t the only country with lawmakers abuzz over political uncertainty. The White House released a $4.7 trillion budget proposal for fiscal year 2020 on Monday that left Capitol Hill disgruntled. Details of the plan show a 9% cut to non-defense spending, including funding for Medicare, student loans, and the Environmental Protection Agency.
An increase in defense spending and $8.6 billion for a U.S.-Mexico border wall were also proposed. The budget could create annual deficits of around $1 trillion and would notably add to the national debt. In our view, the plan will likely not gain congressional support, which could lead to another government shutdown in the coming months.
A string of retail store closures by companies like Kohl’s, Gap, J.C. Penney, and Tesla in 2019 have been concerning for our Global Investment Management team. Economic data seems to be on a negative trend, which has been heeded by the Fed given their newly neutral stance on rates and willingness to wait on any further hikes. Our team is closely monitoring economic and financial market data as we consider more defensive positioning in our strategies.
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