Managing risks amid market uncertainties

Friday Investors Club: Oil, gold, and Fed cut expectations (9:13)

CIO Global Head of FX & Commodities Dominic Schnider and CIO’s Daisy Tseng discuss what's next for record high gold prices, whether oil is still useful in a portfolio, and Fed rate cut expectations.

The S&P 500 on Thursday registered its biggest single-day loss since mid-February amid broad risk-off sentiment sparked by renewed geopolitical concerns in the Middle East. The equity benchmark fell 1.2%, Brent crude oil hit USD 90 per barrel for the first time since October last year, and US bond yields dropped across the curve. Minneapolis Fed President Neel Kashkari’s comment on the possibility of no rate cuts this year also added to market anxiety.

With investors gearing up to Friday’s release of the US labor report for March, the latest market developments are reminders that effective risk management within portfolios remains key against the current macro backdrop.

Geopolitical uncertainties present ongoing risks. Iran said it would retaliate after blaming Israel for an air strike on its consulate in Syria, while Israeli Prime Minister Benjamin Netanyahu said his country will continue to operate against Iran and its proxies. US President Joe Biden on Thursday told Netanyahu its support for Israel’s offensive in Gaza may depend on it taking concrete steps to protect aid workers and civilians. Biden’s warning marked the first time he has threatened to condition aid in the nearly six-month-old war with Hamas. Netanyahu later said Israel would increase aid deliveries to Gaza. Separately, Ukraine has continued attacks against Russian oil refineries, and the US presidential election later this year may provide an additional layer of complexity.

US data and the Fed’s path to rate cuts are likely to swing markets. Investors are hoping that the March labor report, released today, will bolster the Fed’s case in cutting interest rates this year, especially after Kashkari said rate cuts may not be needed if progress on inflation stalls. In one of the most hawkish comments among more than half a dozen Fed officials this week, he said that the January and February inflation data were “a little bit concerning.” While our base case remains that the Fed should be in a position to cut rates by mid-year amid receding inflation and a cooling labor market, Fed Chair Jerome Powell reiterated that the central bank is in no rush and focused on seeing more data before interest rates are cut. It is also worth noting that Kashkari is not a voting member of the monetary policy committee this year.

Market pullbacks can be expected after a strong rally. US equities have had an impressive start to the year. The S&P 500 logged 22 all-time highs in the first quarter, the most since 1998. Our analysis shows that concerns during record highs that markets have peaked are not typically warranted, and we believe the current rally is underpinned by fundamentals. But investors should still expect and prepare for corrections.

So, as history has shown that staying invested and hedging risks is preferable to selling out or being uninvested, we believe investors should look at ways to manage risks within portfolios. A key principle is proper diversification, both within and beyond tech stocks, as well as across asset classes and regions. We also think investors should look at alternative asset classes if they’re willing and able to manage inherent risks such as illiquidity. Finally, systematic strategies can also be useful additions to traditional portfolios, as they are not influenced by human emotions.