Hello all,
I am writing to provide an update on the current geopolitical situation and its potential impact on our investment decisions.
Hamas-Israel Conflict and Its Potential Impact
The ongoing conflict between Hamas and Israel has been a topic of concern for many. While the situation is complex and fluid, it’s important to understand its potential implications on the global and US economy. US Treasury Secretary Janet Yellen has stated that the conflict is unlikely to have a significant impact on the global economy. In contrast, the International Monetary Fund (IMF) has warned that the conflict could potentially affect global growth. The IMF’s First Deputy Managing Director, Gita Gopinath, mentioned that a wider conflict that causes a significant increase in oil prices could spur inflation and hamper global growth.
Impact on Oil Supply
To expound a bit, the Middle East accounts for more than one-third of the world’s seaborne oil trade. Any instability in the region could potentially affect oil prices. With that said, experts don’t expect a long-term impact on oil and gas prices unless the conflict itself continues to escalate. In addition to this, the US is stepping up enforcement of the price cap on Russian oil in a new phase for the measure that was imposed by the Group of Seven Nations after the invasion of Ukraine.
The Federal Reserve, US Economy & their Impact on our Investment Strategy
Despite the ongoing Hamas-Israel conflict and other global challenges, there are positive indicators in the US economy that are worth noting. The unemployment rate is at 3.4%, below pre-pandemic levels. Moreover, disposable income in the economy has been growing for seven consecutive months. Forecasts for Q4 2023 are optimistic, reflecting increasing signs of a “soft landing”. Additionally, while inflation has been a concern, it has rapidly declined recently with the labor market remaining strong. These positive trends provide a counterbalance to the uncertainties and reinforce our strategy of cautious optimism in our investment approach.
However, we continue to be aware of the potential risks and opportunities that arise from other factors. The COVID-19 pandemic continues to pose challenges and uncertainties for both public health and economic recovery. The fiscal stimulus provided by the government has helped boost consumer spending and business activity, but also increased the budget deficit and public debt. The trade relations with China remain tense and unpredictable, with potential implications for global supply chains and competitiveness. The upcoming midterm elections in 2024 could also have an impact on the political landscape and policy direction of the US.
Among these factors, one of the most recent developments is the Federal Reserve’s decision on interest rates. There are indications that the Federal Reserve may keep interest rates higher for longer. This is part of their strategy to manage and decrease inflation and support economic growth. Higher interest rates have both pros and cons for our investment decisions. On the positive side, higher interest rates mean higher returns on savings and bonds, lower inflation expectations, and a stronger US dollar. These factors can help preserve the value of our investments and increase our purchasing power. On the negative side, higher interest rates mean higher borrowing costs, lower consumer spending, and lower corporate profits. These factors can hurt the performance of stocks and other riskier assets. Moreover, higher interest rates can increase the risk of a recession if the Fed tightens too much or too fast, or if other factors worsen.
In response, we are taking a cautious and flexible approach in our investment strategies. We have taken a slightly defensive position as we expect to see added volatility over the coming months. We are continually monitoring market conditions, adjusting your asset allocations accordingly, and remaining diversified.
If you have any questions or concerns about your financial planning or investments, please feel free to reach out. I am more than happy to schedule a time to talk.
Sources:
US Treasury's Yellen is 'very optimistic' about outlook for US economy | Reuters
Yellen, IMF see economic risks from Gaza war | Reuters
'Fear trade': What Israel-Hamas war means for oil prices and financial markets | Morningstar
U.S. Nonfarm Payrolls Rose 336K in September; Unemployment Rate 3.8% — Update | Morningstar
September U.S. Jobs Report: 336,000 Rise in Payrolls, Well Above Expectations | Morningstar
Unemployment Rate Expected to Fall — Data Week Ahead | Morningstar
Fed Signals Higher Rates for Longer, but We Expect Aggressive Cuts in 2024 | Morningstar
Fed may have to raise interest rates once more this year, Mester says | Morningstar
What ‘Higher for Longer’ Interest Rates May Mean for Your Investment Portfolio | Morningstar