by Connor Darrell CFA, Assistant Vice President – Head of Investments

It was a volatile week for global equities, as trade tensions, geopolitics, and movements in the yield curve stoked fears of further weakening in the global economy. By far the biggest influence on market returns during the week was the inversion of the 10-year and 2-year treasury rates; which has historically been viewed as a recession warning. The ensuing shift in sentiment pushed equity markets into a selloff and provided further support for a bond market which has rallied strongly over the past 12 months. In fact, last week marked the first time in history that the 30-year U.S. treasury rate dropped below 2%; a sign that investors are questioning whether the economy will be able to return to previously achieved long-term growth rates. 

While it is likely that the future opportunities for investors will be fewer and farther between than in recent history, we remain cautiously optimistic that a trade deal will be achieved and that the confusion and uncertainty the trade tensions have caused will eventually be lifted. The timing of any deal remains entirely uncertain, but it is that uncertainty that makes it all the more important for investors to remain disciplined. We provide our current thinking on the recent volatility, the ongoing trade war, as well as the yield curve inversion in our most recent market note.

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Global equities ended the week modestly lower after recouping some of Monday’s sharp losses. A re-escalation of trade tensions dominated the attention of markets for most of the week, as China allowed its currency to decline to its lowest level against the dollar in over a decade. The move has been widely viewed as a response to President Trump’s announcement of a new round of tariffs (a weaker currency makes Chinese goods more affordable for foreign buyers) scheduled to go into effect in September. Bond yields continued their downward trend as the equity market volatility led investors to seek the relative safety of U.S. Treasuries, which still offer attractive yields in comparison to those available in much of the developed world. In many places around the world, bond investors are faced with negative yields.  At present, a record $15 trillion of bonds around the world now carry negative interest rates.

How Do Currency Valuations Affect Investors?
The sudden decline in the value of the Chinese Yuan that followed President Trump’s announcement of a new round of tariffs led many in the administration to label China a “currency manipulator,” a term which was not being used to describe Chinese economic policy for the first time. The rising tensions have increased market volatility and altered the market’s perception of risk, causing safe haven assets such as U.S. Treasuries to rally further.

We often think of our portfolios as being comprised of stocks and bonds, and rarely do we have direct positions in foreign currencies, but it is important for long-term investors to understand how exchange rates fit into the bigger picture.  In general, foreign exchange rates are a byproduct of the economic backdrop. All else equal, a country with a healthier economy, higher interest rates, and a stronger balance sheet will have a more valuable currency. This is why we have seen the dollar continue to appreciate throughout much of the last several years. The flip side of the coin for large multi-national corporations is that a stronger dollar may weaken reported sales and earnings because its products become more expensive to foreign customers. This is part of the reason we have seen a tapering of earnings growth for U.S. companies during recent quarters. 

The strength of the dollar may continue to cause headwinds for large multi-national corporations, but in general, it is a representation of the relative strength of the U.S. economy and should not be overly concerning for investors. The more challenging phenomenon for many investors who may require income generation from their portfolios is that the recent moves have led to increased volatility in markets and have pushed bond yields even lower. In a low-yield environment, it can be tempting for bond investors to seek out more risky assets such as high-yield bonds and the debt of governments located in emerging markets. However, despite their more attractive yields, these investments offer much less protection during market downturns. It will be important for many investors to avoid the temptation to load up on these types of investments and to maintain a healthy allocation to core, high quality bonds due to their ability to provide a counterbalancing effect to equity risks within a diversified global portfolio.