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Capital market update: The great push-pull


December 4, 2018

Capital markets have remained volatile throughout the fourth quarter. Investors have had a lot to digest: midterm elections, trade tensions, conflicting views about energy output amongst major world suppliers, uncertainty regarding future interest rate policy, as well as the usual spate of global economic data and corporate earnings reports. Since reaching the highs in late September, U.S. equities (as represented by the S&P 500) have fallen more than 6 percent while international developed stocks (as represented by MSCI EAFE Index) have dropped over 9 percent, emerging market stocks (as represented by MSCI EM Index) have fallen more than 4 percent, and crude oil (as represented by West Texas Crude WTI) has tumbled over 25 percent. One welcomed development over the time period has been positive results from traditional bond proxies that had been challenged earlier in the year. 

Our viewpoint remains that the outlook for portfolio returns is more balanced right now than it has been, predominantly because of two central factors. First, global economic growth is slowing from 2017’s robust and globally synchronized economic recovery. We see this reflected in data we track within our research analysis, as well as from cross-industry corporate earnings reports. Second, policymakers are gradually shifting away from accommodative pro-growth policies (such as buying assets and retaining low interest rate targets), feeling that inflationary pressures warrant higher interest rates and less of a growth push from governments and government agencies. 

A third factor gripping markets is trade policy, with the United States and China as the leading actors on this important stage. Specifically, investors worry that the global economy may risk having to recalibrate to a world with dynamic trading relationships, where supply chains, companies and workers are forced to readjust to a new trading paradigm. As countries become more inwardly focused, the potential changes to existing relationships leaves investors anticipating an uncertain future path. 

The last few trading sessions have been microcosms of the push-pull of economic data, central bank policy concerns and trade negotiations. The tone of data has been generally sluggish, leaving investors feeling somewhat guarded. Heading into an important G-20 meeting in Buenos Aires this past weekend, investors were optimistic that China and the United States could come to a trading pact agreement. Hopeful headlines emerged on Saturday and investors reflected a sanguine view towards future negotiations. However, as today’s trading session unfolded, it appears investors are looking for more details and a concrete timeline before following through with more optimism.

Our investment guidance

While it is difficult to predict policy outcomes, our ongoing analysis of policy, corporate earnings and the economy leads us to conclude that the great push-pull of policy headwinds and a slowing economic trajectory could leave us in a volatile capital market environment for the next few quarters. That does not mean that we are pessimistic about the path forward, but instead realistic that the current capital market environment will be forced to go through an absorption and reactive phase. 

We continue to stress a globally diversified approach. As we have discussed in prior missives, diversification has not necessarily proven to be helpful over the past few years, with U.S. equities dominating returns. However, our view is that in an uneven growth environment, with policy risks and rewards aplenty, having multiple return streams working for your portfolio may potentially prove to be more helpful than recent experience. 

As always, if we can help with your specific and unique situation, please do not hesitate to let us know.

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This information represents the opinion of U.S. Bank Wealth Management. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. Any organizations mentioned in this commentary are not affiliated or associated with U.S. Bank in any way.

Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.
Past performance is no guarantee of future results. Indexes shown are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The MSCI EAFE Index includes approximately 1,000 companies representing the stock markets of 21 countries in Europe, Australasia and the Far East (EAFE). The MSCI Emerging Markets Index is designed to measure equity market performance in global emerging markets.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. There are special risks associated with an investment in commodities, including market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. 




Important Disclosures

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U.S. Bank and its representatives do not provide tax or legal advice. Your tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.

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