Stormy Investment Seas

This month the investment markets have been very volatile. This volatility has been caused by the following reasons:

Interest Rates. New Fed Chairmen Jerome Powell has reaffirmed the Fed’s plan to increase interest rates gradually in recent speeches. Maintaining a gradual pace of hikes is a key to future gains in the equity markets. Wage increases for this cycle have been moderate on a historical basis, and Mr. Powell believes current conditions are unique when it comes to inflation.

Tariff Talk. Investors fear that Trump’s showdown on trade with China and other nations could derail the resurgent US economy by denting business confidence.

Bank of America warned in a report on Friday that supply chain disruption and waning confidence could create a “trade shock” that leads to an “outright recession.” While the firm said the odds of a “full blown trade war” are low, the risks are rising”

JP Morgan’s Kelly said he’s not worried about a recession this year. However, he said “we do know if you add uncertainty to the environment, it will slow the economy.”

Federal Reserve Chairman Jerome Powell said last week that the central bank is hearing for the first time from businesses about postponed investment, hiring and decision making because of the trade worries. “That’s a new thing,” Powell said.

Italexit. Italy finally formed a government over the last few months. But this is just the beginning of a long, rocky road ahead. Many Italians blame the European Union for their problems, but Italy has its own internal and regional issues that are also to blame. Nevertheless, residents of the economic union’s fourth largest member feel detached from the EU, and the new populist government has a clearly Eurosceptic tint. Higher taxes and conflicts with the Eurozone’s fiscal and monetary rules are likely.

As a result, there is concern of “Italexit” and/or potential default on government debt. By way of comparison, Italexit would be about 10 times bigger than the threat of “Grexit (Greece leaving the European Union).” Of course, there is also the risk of contagion. Anything can happen, and we expect rough seas for Europe over the next few months but no Italexit.

Even with these issues showing no sign of disappearing soon, we don’t feel there needs to be any significant adjustment in our current allocation. With the strong economy and with quarterly earnings at record highs, we feel there is a good chance that markets will be higher by year end.