A Few Things We’re Watching - Pt 3

June 01, 2018
By Patrick V. Masso, CFA

Foreign currency movements routinely impact the revenues and expenses of corporations and have done so to an even greater extent over the last several decades of globalization.

During last month’s issue of Investment Insights, we reviewed initial claims for unemployment insurance and the consumer price index. Today, we will provide an update on the other two data series we first discussed in August 2017:

  • The trade-weighted U.S. dollar
  • High-yield bond spreads

Foreign currency movements routinely impact the revenues and expenses of corporations and have done so to an even greater extent over the last several decades of globalization. The U.S. dollar saw a huge increase between mid-2011 and the end of 2016. In contrast, the dollar declined nearly 7% in 2017. Since our August 2017 issue, however, the dollar has managed to stop the decline and trade in a sideways range. In mid-April, the U.S. currency began a significant push higher.

Economies across the globe have begun diverging. This is in stark contrast to the last year and a half, when growth across all economies had been accelerating in unison. A divergence in growth has historically been supportive of the U.S. dollar; it’s probable this will remain the case for the rest of 2018.

A stronger dollar typically has a meaningful impact on investments denominated in other currencies, such as emerging market bonds and foreign stocks. U.S. equities have generated a material level of outperformance relative to foreign equities in 2018. Emerging market bonds have struggled.

Let’s switch gears to the high-yield bond market. As we stated last summer, the high-yield bond market tends to perform strongly when the economy is chugging along and the risk of borrowers defaulting on loans is, therefore, low. The additional yield, or “spread”, from investing in these riskier bonds has been reduced a bit more since last August and has traded in a sideways range recently. We chose not to overstay our welcome and have reduced exposure to this category in 2018.

Whether it’s changes in currency movements or shifts in a certain pocket of the bond market, we philosophically believe in enhancing risk-adjusted returns for our clients through tactical asset allocation. Sometimes it’s not about what you want to own, but what you don’t want to own or at least own less of. Our model portfolio performance track record demonstrates an ability to add value through our tactical decision-making process.

It takes time, focus, technology, and dedication to a “rinse and repeat” process of analyzing global economies and capital markets each week. Our Wealth Management Team is committed to the analysis of markets so that we can best serve our customers.


Securities and insurance products are NOT deposits of Heartland Bank, are NOT FDIC insured, are NOT guaranteed by or obligations of the bank, and are subject to potential fluctuation in return and possible loss of principal.

Legal, Investment and Tax Notice: This information is not intended to be and should not be treated as legal advice or tax advice. Readers should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal or tax advice from their own counsel.