Tuesday, July 3, 2018

Monthly Market Insights: July 2018 | Land of the Free and Home Country Bias

Mark K. Nickel, CFP, CIO
Author position
Chief Investment Officer

Land of the Free and Home Country Bias

Each year on the Fourth of July, we celebrate our great nation. To be sure, there is plenty to celebrate: our collective wealth and security, our democratic government, and of course our many freedoms! Living, working, and thriving in the United States make it comforting and intuitive for us to invest most of our wealth in the US economy. This phenomenon is termed “home country bias.”

Most global investors hold some level of this bias. Nigerian pension funds, for instance, are only able to allocate 5% of assets outside of Nigeria, in our view, due to an implicit home country bias. Back on home turf, the US accounts for ~52% of the world’s stock market value. This means nearly half of that global equity opportunity is overlooked by US investors. The Investment Strategy Group (ISG) believes we must consciously manage home country bias. Fortunately, our team is working with your Wealth Advisor to ensure you are appropriately positioned.

Bonds take Center Stage while Stocks Fluctuate: This month’s ISG roundtable focused on the bond market, where the spread between short-term and long-term rates has compressed. A 2-year Treasury yield above the 10-year (an “inverted curve”) has preceded each of the last nine recessions. That said, a narrow 2/10 spread, but not yet an inverted curve, has corresponded with strong equity returns. Also:

  • The Federal Reserve hiked its Fed Funds target range by 25 basis points (0.25%) in June. This was the seventh hike this cycle.
  • Following a robust year for US equities in 2017, the S&P 500 rose just 1.7% in the first half of 2018.
  • YTD through June, Consumer Discretionary and Technology were the best performing equity sectors, rising 10.8% and 10.2%, respectively. Telecom (-10.8%) and Staples (-9.9%) were weakest.

Tariffs and Trade Rhetoric: We expect rhetoric to stay contentious this summer, with China and the EU giving little ground before US mid-term elections. Actual damage to the US economy so far seems minimal, offset by things like tax cuts and cash repatriations. ISG continues to monitor important developments on this front, but trade is just one factor in the broader investment decision making process.

Opportunities: Higher short-term interest rates offer investors a chance to earn modest income on idle cash balances while varied year-to-date returns across asset classes and sectors could make this a good time to rebalance portfolios. We also suggest focusing on intermediate or short-term high-quality bonds. This is due to the flat structure of the yield curve and investors not being compensated adequately for riskier bond investments. ISG is working with your Wealth Advisor to identify solutions along these themes.

As Americans, we intuitively gravitate toward opportunities in the US economy, but a home country bias can leave us underexposed to other dynamic areas. In concert with ISG, your Wealth Advisor is equipped to help you manage risk and benefit from global opportunities.

Name To Know

John L. Flannery | Chairman & CEO, General Electric

John Flannery became CEO of General Electric in August 2017; he began his career with GE in 1987. Mr. Flannery is of note this month with the conglomerate announcing plans to re-shape itself into a more streamlined Industrial company.

Over the next 18-36 months, GE plans to exit its stake in a large oil & gas services business, and plans to spin off its Healthcare division. This move is in addition to an ongoing effort to minimize GE Capital. Core areas of focus moving forward include Aviation, Renewables, and Power. Mr. Flannery is also Chairman of GE’s Board of Directors.

Each client’s investment needs, risk tolerance, and goals are different. This newsletter is not meant to be advice for any specific investor. Nothing in it should be construed as an offer to sell, or a solicitation of an offer to buy, any securities. This should not be used as the sole basis for an investment decision. Any opinions or estimates are subject to change without notice. For information about how any of this information applies to your per­sonal financial situation, please contact your Wealth Advisor.

Past performance is not a guarantee of future results.

Although the information provided to you in this newsletter was obtained or compiled from sources that we believe are reliable, J.J.B. Hilliard, W.L. Lyons, LLC cannot, and does not, guarantee that the information or data is accurate, timely, valid, or complete.

All investing involves risk, including the possible loss of principal. You should carefully consider investment objectives, risks, charges, and expenses of any investment before investing. Diversi­fi­cation and asset alloca­tion do not guarantee a profit or guarantee against a loss.

Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market or economic developments. The bond market is also volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect can be more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks.