Investors Weigh Strong Earnings along with Geopolitical Risks
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 04/27/18. Rates and Economic Calendar Data from Bloomberg as of 05/01/18. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
Markets have taken a stubborn stance in a week defined by predominantly positive economic news, continued upside earnings surprises from U.S. equities, and a meaningful decrease in volatility levels. Over the past week the S&P 500 index was unchanged, while the Russell Midcap Index gave up 0.08% and the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, declined by 0.49%. On the international front, developed markets retreated 0.25% last week while emerging markets finished the week down 1.01%. After weeks of observing contradictory movements in the yield on the 10 year U.S. Treasury and the U.S. Dollar, a relationship that has exhibited a positive correlation historically, the Dollar now appears to be making its best attempt to catch-up. The yield on 10 year U.S. treasuries was unchanged from the prior week at a level of 2.96%, while the U.S. Dollar increased 1.47%.
We remain constructive on the current economic environment, and while we continue to contend that 2018 will be a positive year for global economic growth, we are watching two geopolitical events closely. The first being on-going negotiations between North and South Korea, shepherded by the United States. Following Kim Jong-un’s landmark visit to South Korea, negotiations appear to have been a success with major Asian markets rising on the hope that North Korea will abandon its pursuit of a nuclear weapons program. While we are optimistic regarding the prospect of a denuclearized Korean peninsula, history reminds us that we should exercise caution and prepare for all eventualities.
The second geopolitical event presenting increased risk to global markets is the potential reimposition of sanctions on Iran, which looks increasingly more likely following Israeli Prime Minister Benjamin Netanyahu’s claim that Iran has secretly maintained plans to develop a nuclear weapons program. Commodities markets and oil in particular, have historically been priced based off of supply and demand. This is why OPEC has largely succeeded in dictating oil prices for decades. Currently WTI Oil stands at $68.10 per barrel, and Brent Oil registers at $74.64 per barrel. If Iran is disallowed from further distributing oil to the international community, oil supply would decrease steeply, and prices could subsequently reach $80 to $85 per barrel. Oil prices holding firmly at $85 per barrel for a sustained period of time could translate to elevated inflation levels, leading potentially to a larger increase in interest rates than anticipated. Fortunately U.S. energy production continues to grow in size and scope, and should partially dilute some of the negative consequences of high oil prices through increased supply of domestic energy sources (i.e. oil and natural gas).
Despite these concerns, we find solace in reported S&P earnings for the 1st quarter of 2018, which have been spectacular thus far and continue to beat high expectations. Following a mandatory post earnings black-out period, we expect some increased buybacks, along with an accommodative Real Federal Funds Rate that remains near 0%, to fuel further growth in domestic equity markets. With that said, portfolio diversification becomes increasingly important in times of heightened uncertainty, and we encourage investors to revisit the diversification that may or may not be in place within their existing portfolios. If you would like to learn more about how we are helping clients invest dynamically and consistently with their goals and tolerance for risk, please do not hesitate to speak with your Hennion & Walsh Financial Advisor.
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion & Walsh cannot guarantee the accuracy of said information and cannot be held liable. This information is provided for informational purposes only and is not a solicitation to buy or sell any of the asset classes or sectors discussed.
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