School is out, baseball is starting and summer is on its way. While family reunions, vacations and warm summer nights may be on your mind, we can’t ignore the markets during this time. While markets are typically in a lull during the summer months, let’s check on the health of the economy and the markets:
Summary, Last Qtr: In Q2, inflation, as measured by the PCE (personal consumption expenditure minus oil and food), the Fed’s favorite metric for inflation, was up .1% in February compared to January, but it was down .1% on a real basis. The big surprise was the March jobs report, which showed the economy added only 126,000 jobs, but more importantly, those were mostly in the service sector where wages tend to be much lower. Additionally, there is an oversupply of labor globally which will only get worse as workers become available online, not to mention technological developments are replacing labor as well. All this leads to a situation where there is little upward pressure on wages. Without much upward pressure on wages, it’s hard to see inflation hitting the Fed’s 2% target. That being said, there is worry at the Fed that if they do not raise rates, i.e., start “normalizing” monetary policy, it won’t have much room to battle future downturns. So there is internal pressure to raise rates this year, which Janet Yellen has said she expects to do and as many people expect to happen.
Our Commentary: So what does this mean for us? Because the U.S. is a bit ahead of the rest of the world on a monetary policy level, there is divergence between central bank policies, thus increasing volatility. That translates into country selection becoming critical, not to mention the type of investment (stock, bond, commodity,etc) being critical as well. A general, broad based investment strategy may suffer more during this time as risk is relatively more important, meaning selection is more important that it was a few years ago. Additionally, we see some attractive international opportunities on a value basis and we have started, even so slowly, introducing some international exposure back into our equity portfolios. Interest rate risk is still the theme in the bond market, however that saga continues to drag on while we wait for the Fed to make a move.
Our Investment Committee periodically monitors the markets and will continue to provide comments at the beginning of each quarter. Each portfolio is different and we recommend getting individual help, which we are happy to provide.
Here’s to summer time!
International investing entails special risk considerations, including currency fluctuations, lower liquidity, economic and political risks, and differences in accounting methods. Past performance cannot guarantee future results.
Fixed income securities carry interest rate risk. Fixed income securities also carry inflation risk and credit and default risks. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
Certain statements contained within are forward-looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.
Opinions voiced are not intended to provide specific advice and should not be construed as recommendations for any individual. To determine which investments may be appropriate for you, consult with your financial professional.
Indices are unmanaged measures of market conditions. It is not possible to invest directly into an index. Past performance is not a guarantee of future results.