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U.S. ties for second in financial market contest

Wade Balliet
Posted by Wade Balliet
Investment Strategy

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

aerial photo of Rio de Janiero, Brazil, as fog creeps in.While the world watches the summer games held in Rio, Brazil, investors are still keeping their eyes glued to the tickertape as they watch for which assets will sit atop the winners’ podium. Over the last three months U.S. stocks and gold, the commodity not the medal, have tied for the second place spot. The S&P 500 Index and gold futures gained 5.99% over the last three months through Tuesday, but the real winner – by far and away – was emerging markets. The country group, of which Brazil is a meaningful part, gained 16.38% over the period earning the coveted gold medal and the top spot on our leaderboard.

Despite the second place result, domestic stock markets hit yet another all-time high this week as the S&P 500 Index closed above the 2,190 level on Monday. The previous record high before the 2008 crisis was 1,565.15 in October 2007 – over 40% lower than our current value. While select fundamentals remain strong, we don’t believe that is the reason for the elevated prices we are seeing. We continue to believe that monetary and fiscal policies are key drivers to financial returns in the current environment; the Fed and other central banks are likely boosting prices via increasingly easy policy and stimulus programs. From our view, this has been the case for some time and may reverse when central banks decide to shift toward slowing down their “overheating” economies.

Putting the brakes on the economy may come sooner than some expect. Just yesterday New York Fed President William Dudley warned investors that the probability of an interest rate hike from the Fed may be higher than markets expect. Bank of the West Economics anticipates a rate increase in the fourth quarter of this year and another in the first quarter of 2017 on the prospects of steady job growth and healthy real consumption expenditures. Additionally, according to Bloomberg, fed fund futures are showing the probability of a hike in September to be 22%, but 51% in December. However, even as some global economic releases illustrate better-than-expected data and thereby increasing chances of more restrictive policy, there are still downside risks. Among other headwinds, China remains an important player in the global economy and is showing mixed results in retail sales and industrial production as the country attempts to deal with bad debt in its banking sector.

Our group continues to capitalize on the upward moves in the equity markets by reallocating to high quality regions and asset groups in our strategies. Although we are slightly overweight equities, our allocations are leaning toward developed areas. We remain underweight in bonds as yields hold steady at low levels, and we expect they may be there for some time.

chart showing weekly performance of various markets

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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 does not ensure a profit or guarantee against loss.

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