Investment Insights: Playing the waiting game
This weekly report presents insights from our Global Investment Management team.
Stocks pared gains on Tuesday as markets hesitated over when the U.S. and China will actually reach their long awaited trade deal before recovering on Wednesday after the Fed’s meeting.
After a lull in early March, U.S. stocks have been back on their upward path with the S&P 500 gaining over 3% since March 8, bringing the year-to-date return to over 13%. President Trump remarked that, “talks with China are going very well,” at a White House press conference on Tuesday.
Despite the consistent praise from both leaders, cracks are beginning to show in the potential agreement. The U.S. administration is continuing to push for improvements to policies involving intellectual property and the forced transfer of technology. Both sides seem to be looking to include assurances and targets in the agreement, particularly as some officials remain skeptical about how well the language can be enforced. Stock markets have likely priced in a resolution to the trade dispute and any hiccups could cause volatility. A meeting between President Trump and President Xi Jinping to sign the trade deal has continued to be pushed back and may happen in April at the earliest, according to Bloomberg.
The Federal Reserve concluded its two-day March meeting and, as widely expected, held rates steady in the 2.25% to 2.50% range. The new “dot plot” was surprisingly conservative and reflected a lower outlook for rates, including the Fed’s intention for no further hikes this year. The recent dovish tone has bolstered financial markets as investors bet that global monetary policy officials will act to support growth and avoid a slowdown. Markets were predicting essentially no chance of a hike or a cut at this meeting, according to fed funds futures data aggregated by Bloomberg, and now show a matching zero percent chance for a hike at each of the Fed’s remaining meetings in 2019. However, the market’s chances of a cut have actually grown to 50% by their January 2020 meeting, while the Fed’s median projection could include one more hike sometime in 2020.
The U.K. government will be requesting an extension to Brexit at the EU Council’s meeting tomorrow after a series of votes last week outlined how British Parliament wants to move forward with the process. Following votes to avoid a no-deal exit and block a second referendum vote, representatives approved seeking a longer timetable. However, U.K. Prime Minister Theresa May has been barred from submitting her Brexit agreement for a third time unless substantial changes have been made. Further negotiation could lead to even harsher terms that will have less chance of passing in parliament, while unconvinced EU officials could approve a delay of about 12 months, or deny the extension altogether.
For now, our team is enjoying the notable rebound in the market since the start of the year. We have analyzed a few different trades within our strategies to capture those gains, and may periodically trim our more volatile exposures in stocks. The Global Investment Management team is also considering reducing allocations to high yield and investment grade corporate bonds, and investing those proceeds into shorter-term Treasuries. While we continue to wait patiently for geopolitical resolutions on trade and Brexit, we remain proactive within our portfolios.
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