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Posted on JUL 25, 2018

Johnson Bank Wealth Weekly Investment Commentary | Wednesday, July 25

This is part of an ongoing series of Weekly Commentary articles published by Johnson Financial Group.
This week's issue is written by Brian Andrew, SVP, Chief Investment Officer.


From Russia with Love

Ah, I have your attention! It isn't too hard to come up with a title that includes “Russia” this week that will do that. I am a fan of James Bond films, and in 1963, they released my favorite, “From Russia with Love” starring my favorite Bond, Sean Connery. The movie involves agents from SPECTRE who try to pit British and Russian intelligence agencies against one another to obtain a cryptograph from the Soviets. (This was the height of the Cold War, and they were still Soviets then.) The movie was shot in Turkey and involved many scenes in Istanbul. In many ways, it provides a metaphor for the issues hitting investors this week.


Or in our case, bonds, as in fixed‐income securities. Last week Federal Reserve Chairman Jerome Powell had an opportunity to provide testimony to Congress. In this semi‐annual dance, he discusses the economy and Fed policy, and Congress has an opportunity to question him about whatever is on the Fed's mind. These meetings are watched closely by bond investors as they look for clues about the future direction of the Fed's interest rate policy. In his remarks, Powell highlighted four things that weren't that surprising:

  • The job market is strong (no surprise because the unemployment rate remains below 5% and continues to head downward).
  • Inflation should remain near the Fed's target of 2%.
  • The economy is seeing a lift in growth due to the benefits of tax reform. The question for the Fed and investors is whether that is transitory or permanent.
  • The Fed believes it can stay on their current path of hiking short‐term interest rates.

He summed up the Fed's economic view when he said, “. . . the job market will remain strong and inflation will stay near two percent for several years.” He provided insight into the Fed's monetary policy position when he said, “. . . the best way forward is to keep gradually raising the federal funds rate . . .”

Finally, Powell echoed the market's view of trade policy concerns when he said, “It is difficult to predict the ultimate outcome of current discussions over trade . . .”

It is our belief that part of what he says is correct — inflation should remain near target. Whether the additional economic growth is transitory or permanent remains to be seen. As a result, our position for fixed‐income investors remains the same. We will continue to favor a shorter average maturity than our targets, albeit modestly lower. We will take advantage of the better yields available on the short end of the yield curve and position portfolios to improve yield as short rates move higher, as the Fed suggests. We will continue to invest in intermediate maturities because we believe that growth is more transitory in nature and from time to time bond prices will improve on this part of the yield curve.

Like the decoding machine from the Bond movie, we will use information regarding wage growth, capital expenditures and corporate revenue growth to provide insight into how permanent the change in economic growth and inflation will be.

On Location

The Bond movie was shot in Turkey. Today, Turkey provides insight into what ails many emerging market economies. The Turkish lira has declined in value by 24% since the beginning of the year. The combination of geo‐political uncertainty, trade issues with the EU and a significant amount of sovereign debt has investors concerned about the future for the economy and markets there. (The Turkish stock market has declined as much as 25% from its high point in February to a recent July low.)

Emerging markets with weak currencies (stronger U.S. dollar) and either a heavy reliance on commodities such as coal, oil or industrial metals or a debt‐laden balance sheet have been in retreat since March.

We believe that some companies in these markets may provide opportunity for the active investor who can find them. Much like a global search for a Russian spy, with the right acumen stocks can be found that have become much more attractive as a result of the sell‐off in these markets. We normally advocate for an allocation to international stocks and particularly emerging markets.

While Russia and trade policy grab headlines, we are more focused on the message being sent by corporations who have begun to report their revenue and earnings growth for the second quarter of 2018. To date, reports have been supportive of an earnings growth rate in excess of 20%. Trade issues have been discussed by some CEOs in their earnings report; however, to date the impact seems to be narrow in terms of the industries most affected.

In fact, to date, these earnings reports look more like good news from Bond to M than the bad news being sent back home by Rosa Klebb.

Brian Andrew
As Chief Investment Officer, Brian Andrew leads Johnson Financial Group's investment strategy
to provide consistent, actionable investment solutions for our clients.

This information is for educational and illustrative purposes only and should not be used or construed as financial advice, an offer to sell, a solicitation, an offer to buy or a recommendation for any security. Opinions expressed herein are as of the date of this report and do not necessarily represent the views of Johnson Financial Group and/or its affiliates. Johnson Financial Group and/or its affiliates may issue reports or have opinions that are inconsistent with this report. Johnson Financial Group and/or its affiliates do not warrant the accuracy or completeness of information contained herein. Such information is subject to change without notice and is not intended to influence your investment decisions. Johnson Financial Group and/or its affiliates do not provide legal or tax advice to clients. You should review your particular circumstances with your independent legal and tax advisors. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared. Past performance is no guarantee of future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. Certain investments, like real estate, equity investments and fixed income securities, carry a certain degree of risk and may not be suitable for all investors. An investor could lose all or a substantial amount of his or her investment. Johnson Financial Group is the parent company of Johnson Bank, Johnson Wealth Inc. and Johnson Insurance Services LLC. NOT FDIC INSURED * NO BANK GUARANTEE * MAY LOSE VALUE

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