Investment Insights: Delaying the inevitable
This weekly report presents insights from our Global Investment Management team.
The most recent rally in stocks seems to be stalling as tensions escalate between the U.S. and Iran, and as investors hold their collective breath in anticipation of President Trump’s meeting with Chinese President Xi Jinping this weekend.
The S&P 500 is down over 1.2% in the last four trading days after U.S. markets lead the June rebound, climbing 6.1% so far this month, while international markets gained 5.5%, according to MSCI data.
Comments from Federal Reserve officials sent yields even lower yesterday after Chairman Jerome Powell voiced his support for easing policy, but stopped short of signaling a rate cut; the 10-year Treasury yield fell to 1.99% yesterday for the first time since 2016. Stock and bond markets continue to battle over the future as bond yields seem to reveal rising concerns, while stock markets march stalwartly higher.
Investors are still digesting the rapid intensification of hostilities between the U.S. and Iran, and stock markets have yet to notably react. Last week, after a U.S. drone was shot down, a planned airstrike against Iran was canceled by Trump at the last minute. Most recently, the U.S. implemented sanctions on individual Iranian leaders, which are separate from existing country sanctions that have crippled oil exports. According to Secretary of State Michael Pompeo, the U.S. has already sanctioned 80% of Iran’s economy.
Oil prices have jumped over 14% since the beginning of last week and WTI crude reached $59 a barrel today. Tensions between the U.S. and Iran have escalated and a military conflict remains a possibility. However, the U.S. government seems to be open to negotiations, especially if those involve revisiting the nuclear deal.
The recent dovish turn within the Fed has been a support for risk assets, but investors should take care not to become overzealous. Powell’s remarks, along with those of other officials, show that the central bank is open to supporting the economy, but may not be as accommodative as investors are expecting.
Markets are currently pricing in substantial rate cuts before the end of the year. Based on fed funds futures data, investors believe the Fed will cut rates by 50bps in July, or two quarter-point moves in July and September, and then cut rates by another 25bps in December. A July cut remains at a 100% probability according to the same data. Bond investors seem to be feeling pretty bearish, but Fed officials may not make such a substantial move if economic data and financial markets hold steady.
Our team is still modestly optimistic about the economy, but risks to our outlook continue to unfold. We remain fairly cautious within the financial markets over the short term. While rate cuts would support a continued climb for stocks, a fragile economy and a growing list of geopolitical concerns, like the U.S.-China trade war and escalating tensions with Iran, weigh on prices. Central bankers will only be able to delay the inevitable for so long. When it comes to an economic slowdown and financial market weakening, it’s not a matter of if, it’s a matter of when.
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