SUMMARY
Deeper Middle Eastern strife, trade tensions, and weaker corporate and economic data contribute to the ongoing uncertainty. We are positioning portfolios accordingly.
KEY TAKEAWAYS:
Markets have proven resilient in the face of recent uncertainty
We acknowledge economic, corporate and geopolitical risks ahead
We are not adding to long-term bond allocations and are neutral global equities
We believe gold may offer potential diversification to equity-bond allocations
This is a key question for global markets in the wake of the world's largest military power following up on Israel's recent raids against Iran.
The initial reaction on Monday, June 23, was muted, not only in crude oil but also in US equity and fixed income markets.
However, if Iran retaliates in a way the US sees as escalatory, a pronounced market selloff would likely occur.
Economic uncertainty
This latest bout of geopolitical unrest comes on top of some weak US economic data last week, specifically around US data and housing.
Against this backdrop, the Federal Reserve seems to be headed for two interest rate cuts this year and one fewer than it previously expected next year. It sees inflation pushing up to 3.1% by the end of this year owing to tariff effects.
In response to the uncertainty, investors seem to be demanding additional returns from longer-dated bonds in return for the perceived extra risk.
We are therefore not allocating more to such bonds at this point.
Why we added gold
We added gold to portfolios earlier this month.
With equity and bond markets often having moved in the same direction lately, we believe the yellow metal can help hedge risk.
Gold may deliver positive returns if either economic data deteriorates further and/or geopolitical risks intensify from here.
Of course, de-escalation of Middle East tensions or continued hard data resilience could dampen gold returns, but we'd expect equities to rally in these scenarios.
We ultimately view our gold position not simply as an isolated speculative bet, but as a potential diversifier in multi-asset portfolios to supplement longer-duration Treasuries.
Global equity resilience
Numerous important developments may be seen in the coming weeks.
The evolution of the Middle East conflict, potential trade deals or otherwise ahead of the July 9 deadline, the second quarter's earnings reporting season, sector-level tariffs, and continued negotiation of Trump's flagship legislation in Congress are all pending.
Equity markets are showing resilience. We can rationalize this by looking at underlying leadership, with AI-led growth stocks outperforming defensives and cyclicals since April 1.
If stocks can climb the summer wall of worry, we wouldn't be surprised to see indices reach new all-time highs.
However, our tactical equity positioning remains neutral.
We see markets as probably not priced for worse-than-expected economic, trade, and geopolitical outcomes.
