Investment Insights: You can fight the Fed
This weekly report presents insights from our Global Investment Management team.
Financial markets are breathing a momentary sigh of relief after one of the biggest negative months in recent memory for stocks.
The S&P 500 lost 6.4% in May as investor anxiety increased due to weakening economic data, an uncertain Federal Reserve, and trade based geopolitical risk.
Bonds rallied amid heightened volatility while the dislocation along the yield curve deepened and the gap between the 2-year and 10-year Treasuries widened.
However, a recent statement from Fed Chair Jerome Powell soothed market angst after he stated the Fed was open to a rate cut, if necessary. Stocks advanced yesterday on the remarks.
The Fed comments are some of the first to hint at a potential cut when policymakers had previously broadcasted that current rate levels were appropriate for 2019. Officials cited “trade negotiations and other matters” in their reasoning, while also noting they are looking to sustain the expansion.
The markets have fought the Fed on rates and have been more than a few steps ahead as the probability of a cut has risen over the past several months. Fed funds futures are showing that investors are actually expecting two quarter-point rate cuts – in September and December – according to Bloomberg data. Meanwhile, the Treasury curve continues to flash a warning as medium-term yields invert further. The 10-year Treasury yield has sharply declined over the last few weeks and approached the 2% mark on Monday, reaching 2.07% before reversing higher.
Large tech stocks tumbled following reports that the Federal Trade Commission and the U.S. Department of Justice were launching sweeping antitrust probes into “the growth of monopoly power,” and potential for abuse by some of the sector’s dominant players. Facebook plunged over 7.5% after initial reports on Monday, while Alphabet, Google’s parent company, fell 6.1% and Amazon declined 4.6%.
Our team continues to hold a cautious view of the equity markets over the short term as trade tensions, political risks from Brexit and Italy, and growth concerns weigh on investors. Over the medium term, we are slightly more optimistic due to a potential breakthrough for a U.S.-China trade deal over the summer, and a floor may be created if the Chinese government initiates credit and fiscal stimulus as they have historically. Our strategies remain marginally overweight stocks and alternatives, and hold an underweight to bonds based on our risk/reward views in the current environment.
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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.