Prepare for volatility: BNY Mellon's Lockwood Advisors
July 12, 2018

BNY Mellon's Lockwood Advisors has issued its second quarter 2018 Investment Insights, highlighting how recent market moves may impact investment decisions for the remainder of the year.

"Investors are likely longing for 2017 based on how the markets have performed through the first half of this year," said Matthew Forester, Chief Investment Officer at Lockwood Advisors. "Unlike 2017's stellar returns, this year has brought investors generally flat performance and heightened volatility despite excellent earnings and lower corporate tax rates.

"Looking ahead, it will be important to see how markets react to the continuing political theatre around US trade. Investors have been able to climb the 'wall of worry' to work past many previous market-jarring risk factors, but it's likely that continued uncertainty will lead to increased volatility as we go into the second half of 2018."

The report outlines key trends investors and advisors should be paying attention to include the following.

While first quarter 2018 corporate earnings generally beat overall estimates, this may lead investors to misjudge growth for the remainder of the year. Lockwood believes the pace of sequential earnings gains is likely to slow from the first quarter's torrid pace unless there is dramatic acceleration in the underlying economy.

While markets have previously shrugged off certain geopolitical challenges, it appears likely that investors will become more sensitive to these risks in the second half of this year. Underlying these concerns are signs the global growth engine is sputtering while domestic implications of the US tax plan have not fully been absorbed—especially as it pertains to fiscal debt.

Countries with large fiscal and current account deficits are facing a squeeze due to a strong US dollar as global growth becomes more disjointed. 

US investors should consider the risk profile of their portfolios vis-à-vis foreign currency—volatility between major currency pairs has been playing an increasingly large role in returns, particularly with interest rates at low levels.

Despite near-term currency struggles against the strength of the US dollar, emerging markets are generally still looking more attractive than developed markets on a valuation basis. 

So far, the US economy and corporations have looked healthy enough to withstand the limited scope of the current trade concerns. If negotiations spiral out of control, however, the rock-and-hard-place quandary of higher prices and lower output could damage the economy. Financial advisors should continue to brace themselves for the potential for more volatility as trade negotiations heat up and they evaluate risks of a stagflationary outcome. It will ultimately be up to investors and the markets to distinguish between negotiation tactics and likely policy outcomes. 

"Like last quarter, tighter risk management and properly gauging client risk appetite seem likely to help advisors achieve better outcomes," adds Forester. "Intermittent fasting and anticipating periodic lean times may help achieve an investment diet that suits the medium and the long-term outlook."





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BNY Mellon's Lockwood Advisors has issued its second quarter 2018 Investment Insights, highlighting how recent market moves may impact investment decisions for the remainder of the year.

"Investors are likely longing for 2017 based on how the markets have performed through the first half of this year," said Matthew Forester, Chief Investment Officer at Lockwood Advisors. "Unlike 2017's stellar returns, this year has brought investors generally flat performance and heightened volatility despite excellent earnings and lower corporate tax rates.

"Looking ahead, it will be important to see how markets react to the continuing political theatre around US trade. Investors have been able to climb the 'wall of worry' to work past many previous market-jarring risk factors, but it's likely that continued uncertainty will lead to increased volatility as we go into the second half of 2018."

The report outlines key trends investors and advisors should be paying attention to include the following.

While first quarter 2018 corporate earnings generally beat overall estimates, this may lead investors to misjudge growth for the remainder of the year. Lockwood believes the pace of sequential earnings gains is likely to slow from the first quarter's torrid pace unless there is dramatic acceleration in the underlying economy.

While markets have previously shrugged off certain geopolitical challenges, it appears likely that investors will become more sensitive to these risks in the second half of this year. Underlying these concerns are signs the global growth engine is sputtering while domestic implications of the US tax plan have not fully been absorbed—especially as it pertains to fiscal debt.

Countries with large fiscal and current account deficits are facing a squeeze due to a strong US dollar as global growth becomes more disjointed. 

US investors should consider the risk profile of their portfolios vis-à-vis foreign currency—volatility between major currency pairs has been playing an increasingly large role in returns, particularly with interest rates at low levels.

Despite near-term currency struggles against the strength of the US dollar, emerging markets are generally still looking more attractive than developed markets on a valuation basis. 

So far, the US economy and corporations have looked healthy enough to withstand the limited scope of the current trade concerns. If negotiations spiral out of control, however, the rock-and-hard-place quandary of higher prices and lower output could damage the economy. Financial advisors should continue to brace themselves for the potential for more volatility as trade negotiations heat up and they evaluate risks of a stagflationary outcome. It will ultimately be up to investors and the markets to distinguish between negotiation tactics and likely policy outcomes. 

"Like last quarter, tighter risk management and properly gauging client risk appetite seem likely to help advisors achieve better outcomes," adds Forester. "Intermittent fasting and anticipating periodic lean times may help achieve an investment diet that suits the medium and the long-term outlook."



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