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WIA BELIEVES | The Italian Job

| June 05, 2018

Ah, it’s summertime in Europe, and again, more tumult!

Since the beginning of the decade, problems in Europe have occasionally drifted across the Atlantic.  If it’s not Greece, it’s Portugal.  If not Portugal, it might be Italy or Spain.  And if not Italy or Spain, Great Britain’s Brexit briefly created turbulence in 2016.  More recently cracks in the European financial system have taken a backseat to firmer growth on the continent.  But problems are simmering just below the surface.

Enter the dysfunctional nature of Italian politics and the two anti-establishment parties that took top honors in an early March election.  A coalition was eventually formed between the two groups, but the president of Italy rejected a finance minister who has expressed doubt about the euro, which unites much of Europe.  Concerns the government might ditch the common currency led to a massive spike in Italy bond yields and a global sell-off in stocks the day after the Memorial Day weekend.

We could see new twists and turns, but for now, cooler heads have prevailed.  Yields came off highs as government officials salvaged the coalition and staved off new elections later this year.  My synopsis is simply a thumbnail sketch of events, but you may be asking, “Why the overview of what is only the latest in decades of dysfunctional Italian politics? Why should I care?”

First, it’s a reminder that Europe’s ongoing financial problems haven’t been solved, and what happens in Europe can sometimes trigger uncertainty among U.S. investors…at least temporarily.  This will aggravate short-term volatility in worldwide markets, but is unlikely to have any meaningful real impact on your holdings.

Italians aren’t clamoring to get rid of the euro.  If it were to happen, it would have enormous consequences for Italy, which would then reverberate throughout Europe.  But odds of a “Quitaly” or “Italexit”–financial commentators are once again trying to coin a new term–remain low.  Yet now it’s on the radar.   If nothing else, the drama in Italy is simply a reminder that Europe hasn’t solved its financial problems.

Simply Put – Here We Are Today

  • Financial markets in 2018 have had the most daily, weekly and monthly volatility swings that we have seen in the past three years.  Yet given all that, total investor returns in US stocks, international stocks and in fixed-income remain largely unchanged year-to-date.  We expect continued volatility but with better equity gains.

  • US corporate earnings remain strong, employment is at historic highs, tax rates are favorable and interest rates remain stable but gradually rising.  All considered this is a very healthy environment for stocks.

  • Global economies, especially emerging markets, are still lagging behind the US, but therefore have more room to improve.  We continue to favor global over US.

  • Concerns - Trade wars are not good things.  Political noise and uncertainty are not healthy.  Interest rates are rising (albeit slowly).  The current economic cycle is long-in-the-tooth by historical timelines (but time alone does not create recessions).

  • What Now – stay diversified with an emphasis on global equities and short-term/floating rate fixed-income.  Late economic cycles also favor a value orientation, technology and financial equities, and commodities.

Please contact us if you feel a review of your holdings with us, or those invested elsewhere, would benefit from our Riskalyze analysis.  Wishing you and yours an enjoyable summer!