This Week in Review | Consumer Confidence, Iran Developments, Bond Yields

Transcript

Austin Standiford:

Hello and welcome to This Week in Review. This weekly segment is designed to highlight a few important developments you may have missed this week, what they mean for markets, and more importantly, the potential impact for investors. To stay up to date with our latest market insights, subscribe to our YouTube channel or visit FisherInvestments.com. Now, let's review what happened this week.

First, eurozone consumer confidence.

On Thursday, we got a look at the latest consumer confidence readings in the eurozone, where overall sentiment remains firmly in negative territory, though up slightly from April's three-year low. While this may not sound like cause for celebration, it's worth remembering that eurozone consumer confidence has been consistently negative for the last ten years. That means negative consumer sentiment is nothing new for the eurozone. During that time, markets have continued growing, all without consumers reporting even a month of positive outlook. And while parts of the eurozone are facing headwinds, weak spots are a normal feature of the global economy, even during times of otherwise healthy growth. Bigger picture, as we have noted in the past, neither GDP nor consumer confidence are reliable indicators of where stock prices are heading next. They're valuable context, if inherently backward looking, but what matters most for markets is still the gap between expectations and reality. With consumer confidence expectations down despite bullish economic signs like the eurozone's steep yield curve and positive lending growth, the bar for reality to beat has rarely been lower.

Next, developments in Iran.

Coverage of the war in Iran has revolved around two things. One, headlines about economic headwinds from rising oil prices and supply chain disruptions. And two, rounds of peace negotiations that ultimately yield little beyond promises and saber-rattling. These stories are the twin engines that propel seemingly endless cycles of fearful news. This week was no exception, with reports of peace talks bogging down once again. While the human costs of war are impactful as ever, in the past three months, markets have moved on from the dour economic narratives. To us, this explains why stocks have reached several new record highs since the conflict began. Not because stocks are ignoring the war, but because they have rationally weighed the situation and realized that the global economy is resilient enough to withstand the challenge. This highlights how, despite a near-constant media drumbeat of war fears, markets reward discipline and patience. Against a backdrop of global uncertainty, investors should stay focused on their long-term financial goals and avoid emotional portfolio moves. In the weeks and months ahead, remember that markets are incredibly efficient in pricing widely-known information.

Finally, rising government bond yields.

Recently, there's been a global spike in long-term yields, bringing with it concerns about economic trouble ahead. With 10- and 30-year yields around the developed world at highs we haven't seen in decades, some argue that bonds are becoming an iffy investment. In our view, these fears are unfounded. Why is that? Well, put simply, these elevated rates are still historically low. If bonds are part of your strategic asset allocation, their role in your portfolio hasn't changed. They remain a powerful tool to mitigate volatility and support cash flow needs. As we noted in a recent MarketMinder article, there's no question that long-term bond yields are rising. However, when we take a deeper look, they aren't much higher than the range seen since 2022, and they're returning to historically normal levels as the last echoes of the 2007 global financial crisis finally fade. At that time, central banks across the world attempted to boost growth with quantitative easing programs that deliberately kept long-term rates artificially low. As these programs finally wind down, normal monetary policy and the bond rates that come with it are making a return. So, why all the worry? This likely stems from investors and pundits viewing bonds as the ultimate stable investment, forgetting that "less volatility" doesn't mean "no volatility." So, when yields rise, it looks like a shock to the system rather than an uptick with decades of historical precedent. In our experience, changing your asset allocation in response to this type of short-term negative volatility puts you at risk of missing out on your long-term goals.

That's it for this week.

Thank you for tuning in to This Week in Review. If you're looking for more insights, then don't miss our other series Three Things You Need to Know This Week, released every Monday. You can also visit FisherInvestments.com any time for our latest thoughts on markets. Thanks again for joining us, and don't forget to hit the Like and Subscribe button.