Investment Insights: Delaying the inevitable

Posted By Wade Balliet In Your Wealth | No Comments

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.

[1]

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.

For direct access to investment insights, market updates, and perspectives on financial topics from Bank of the West and BNP Paribas leaders, download the Voice of Wealth [2] app, available at the Apple iTunes and Google Play stores.

==

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.


Article printed from Bank of the West: https://changematters.bankofthewest.com

URL to article: https://changematters.bankofthewest.com/2019/06/26/investment-insights-delaying-the-inevitable/

URLs in this post:

[1] Image: https://changematters.bankofthewest.com/wp-content/uploads/2019/06/Wall-StNYSE_crop.png

[2] Voice of Wealth: https://www.bankofthewest.com/wealth-management/insights/voice-of-wealth.html

Submit an Idea

[contact-form-7 id="32" title="Share An Idea"]

You are leaving the Bank of the West Change Matters site. Please be aware: The website you are about to enter is not operated by Bank of the West. Bank of the West does not endorse the content of this website and makes no warranty as to the accuracy of content or functionality of this website. The privacy and security policies of the site may differ from those practiced by Bank of the West. To proceed to this website, click OK, or hit Cancel to remain on the Bank of the West Change Matters site.