Geopolitical risks increase uncertainty around policy
April 13, 2017
We are generally positive on financial markets, but our optimism is tempered by the increasing uncertainty around the impact of potential drivers of growth going forward. In particular, there is uncertainty around policy decisions, both foreign and domestic, that could affect market returns. We have seen two events likely to impact markets – President Trump's decision to launch missiles at Syria and the disappointing March employment report.
Starting with foreign policy, Trump ordered a missile strike on a Syrian air force base believed to be the one where Syria launched a chemical weapons attack. While the strike was limited to one base, an escalation of this conflict increases the possibility that missteps from either side could escalate the conflict. Russia, an ally of the Syrian government, has called this strike an act of aggression that violates international law.
Further, North Korea has been testing their missile capabilities and has been able to launch them at increasingly further distances. This issue is arguably more concerning than the Syrian crisis as South Korea shares a peninsula with North Korea, which has nuclear weapons aspirations. We expect financial markets to carefully watch how Trump handles these issues. There is always the risk that international events could begin to affect investor's confidence.
Last Friday the government reported that the U.S. economy created the smallest number of jobs in nearly a year. While bad weather likely impacted this report to some extent, there were closings and layoffs in the retail sector. Interestingly, investors interpreted the retail problems to the "Amazon effect," the idea that a significant amount of business is going online.
Still, the pace and scope of Fed interest rate increases will affect market psychology. The Fed has signaled 2 more increases before the end of the year, and the markets have been comfortable with that as corporate earnings and other economic data show economic growth is slowly accelerating. Consumer confidence is the highest in years, which supports increased consumer spending. However if there were changes in economic expectations, Fed policy will be ever more important to investors.
Finally, there is uncertainty surrounding President Trump's economic agenda. The markets are expecting corporate and domestic tax reform, less regulation, increased infrastructure spending and other business friendly policies. If this is stalled, as it appears it may be, it will add to more market uncertainty. So far, the markets have held up well through all of this, and first quarter earnings are expected to be good. We're optimistic, but cautious.
Securities offered through First Allied Securities, Inc., A Registered Broker/Dealer. Member FINRA/SIPC. Advisory services offered through First Allied Advisory Services, Inc. A Registered Investment Adviser. The information in this material is for informational purposes only and is not intended to be specific advice.
D. Scott Peterson, a fee only investment adviser and CEO of Peterson Wealth Management, may be reached at 775-673-1100/775-423-8007 or at Petersonwm.com.