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Current Views

Geopolitical Concerns Weigh on U.S. Equities

On Thursday, stocks fell for a fourth consecutive day as geopolitical issues re-emerged on the heels of mixed economic data and weak earnings reports.

Saudi Arabia led a coalition of ten nations including the six members of the Gulf Cooperation Council in an airstrike campaign against Houthi rebels in Yemen Wednesday night. We see heightened conflict and instability in Yemen having implications for capital markets for two reasons: (1) Yemen borders the Bab el-Mandeb Strait, a pinch point for transporting oil from the Middle East through the Suez Canal to western markets, and (2) the proxy war between Iran and Saudi Arabia is not limited to Yemen, so Iran could respond to this attack with disruption elsewhere in the region. It is noteworthy that Egyptian, Iranian, and now Saudi naval vessels have been involved with attempting to secure access to this key waterway.

A state television report that Saudi Arabia may send ground troops to Yemen suggests this campaign could continue for some time, as does the significant military assets controlled by the Houthis in Yemen, which include aircraft, missiles, and military bases. At the same time, challenges in nuclear negotiations between Iran and six world powers as a key March 31st deadline approaches are compounding the stress in the region. Both Brent and West Texas crude prices advanced 6% in the last two days as these events unfolded, while U.S. equities have sold off about 2%. Notably, growth and momentum stocks have generally underperformed, especially in the health care and technology sectors.

We are tweaking our domestic equity portfolio positioning in response to these events in two ways. First, we are modestly increasing the portfolio’s energy exposure to approximately equal weight versus the benchmark. Secondly, we are slightly reducing our momentum factor overweight in the healthcare and technology sectors. Altogether, these trades will take the portfolio’s cash position to approximately 5%, which we believe better reflects our concerns that geopolitical stresses could continue to pressure U.S. equities in the near-term. Should conditions revert to a more normal state, we would likely seek to reinvest some of this cash.

This information is intended solely to report on investment strategies and opportunities identified by Roosevelt. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. References to specific securities and their issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Please contact us at 646-452-6700 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions, or if you would like to request a copy of our Code of Ethics. Our current disclosure statement is set forth on our Form ADV Part II, available for your review upon request, and on our website, www.rooseveltinvestments.com.

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The Roosevelt Investment Group, Inc. is an independent investment management firm that is not affiliated with any parent organization. The Roosevelt Investment Group, Inc. manages domestic equity, international equity, domestic fixed income, global fixed income, and balanced assets for primarily U.S. clients. The Roosevelt Investment Group, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission and notice filed in all 50 states.

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