Investment Insights: A fragile mood

Wade Balliet
Posted by Wade Balliet
Investment Strategy

This weekly report presents insights from our Global Investment Management team.

Stock markets continue to swing wildly and notably below their record highs after a surprise bout of volatility last week erased a chunk of this year’s gains.

The S&P 500 and global stocks, as measured by MSCI, fell again today, but are still up over 15 percent and 13 percent, respectively, this year.

Meanwhile, bond yields resume their fall with the 10-year dipping to 1.58% this morning and gold rising to $1,516 per ounce.

Mounting uncertainty over economic growth continues to be the paramount concern for investors despite a fairly resilient global stock market that has taken events like the trade war, Brexit, political unrest in Hong Kong, and a recent election surprise in Argentina – that sent its own stocks and currency plummeting – in stride.

Investors may have cornered the Federal Reserve on interest rates as the markets point toward more rate cuts in the future. Fed funds futures are again pricing in a 100% probability of a cut at the Fed’s meeting in September, and are now also forecasting two more cuts at 2019’s subsequent meetings.

Fed Chair Jerome Powell may be in a precarious situation having to not only buoy the economy, but also placate markets. The bond markets continue to stay a few steps ahead of monetary policy makers as the inversion in the Treasury curve deepens and sounds the alarm for economic deceleration. Today, the 10-year Treasury yield fell below the rate of the 2-year for the first time since 2007 – a stronger signal for a potential recession ahead. The market’s consensus view seems to be the expectation of a slowdown in the coming quarters, but the vital question is how much of one.

We continue to see a notable disconnect between the stock and bond markets. Stocks seem to be fairly durable at their current valuation, but earnings may not be there to help as earnings growth is up just 2.11% as we near the end of this season, according to Bloomberg data. Meanwhile, the upside-down curve and a continued decline in yields may show that bond investors are anticipating economic trouble.

Our team continues to be wary in the current environment as risks skew to the downside from numerous geopolitical issues, but also from economic data, particularly the global slide in manufacturing activity. More volatile trading sessions may be ahead for markets as the economic growth picture becomes clearer.

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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.

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