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MCF Weekly Capital Market Review - January 27th, 2020

Equities fell on news of a coronavirus outbreak in China, with confirmed cases later in the surrounding region in addition to the US, Canada, France, and Australia.[1] The virus has claimed 81 lives so far with over 3,000 confirmed cases. The strain of the virus is new and unknown, but it belongs to the same family as SARS (severe acute respiratory syndrome) and MERS (Middle East respiratory syndrome). SARS infected around 8,000 individuals with about 800 deaths; MERS infected around 2,500 individuals with about 850 deaths.[2] The World Health Organization (WHO) is yet to rule a public health emergency due to its restrictive nature; so far it is mostly fatal to older men with prior health problems.[3]

In the US, we’re two weeks into Q4 earnings season with 77% of companies beating earnings expectations so far.[4] Despite the positivity, the markets were overshadowed by the concerns of the coronavirus outbreak. All major equity indices were down, especially US Small Caps and Emerging Markets. As expected in times of uncertainty, core bonds and Treasuries were up. Oil was down over 7% last week[5] and largely responsible for the drop in commodities. The coronavirus outbreak is still new and its impact remains a giant unknown. Market participants can expect further disruption as countries grapple with its containment and effect.

Of note were equities in Hong Kong, with the Hang Seng equity index down 2.81% on Tuesday alone.[6] Hong Kong has been a quagmire of protests since June with pro-democratic protestors originally fighting against a controversial extradition bill, perceived as a veiled attempt of Chinese hegemony over Hong Kong self-governance. As a result of continued protests, Hong Kong experienced a sharp contraction of 2.9% for Q3 2019 GDP[7] and will likely enter recession (two consecutive quarters of negative GDP growth) when Q4 numbers are released. Moody’s downgraded Hong Kong’s credit rating from Aa3 to Aa2 in addition to changing its outlook from “stable” to “negative.” Moody’s cited the government’s failure in creating a tangible plan to address the concerns of Hong Kong citizens, reflecting weaker institutional capacity.[8] 

The International Monetary Fund (IMF) updated 2020 global growth projections to 3.3%. Emerging market growth is projected at 4.4% which is 0.2% lower than the estimate from October. Advanced economies were also projected lower at 1.6%. Still, the 2020 year is expected to experience higher growth than 2019.[9] European assets should have a tailwind for the year as Brexit enters the transition period on January 31. The European Parliament must approve the Brexit deal negotiated by Boris Johnson, then the UK will negotiate trade rules and enforcement with its prior EU partner.[10] Johnson has already ruled out an extension (which will likely hold given the Tory majority of 80) and businesses face fewer uncertainties as trade details are hammered out.

Housing continues its hot streak in December with existing home sales above upper consensus estimates. PMI for January was moderately positive, with the strength in services outweighing the weakness in manufacturing.[11]

This week will feature releases on new home sales, consumer confidence, and personal income and outlays. The Federal Reserve will also have its first press conference of 2020; market participants are expecting no change in interest rates.[12]

INDEX RETURNS


[12] https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by MCF), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from MCF.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.   MCF is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the MCF’s current written disclosure statement discussing our advisory services and fees is available upon request. If you are an MCF client, please remember to contact MCF, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. Please click here to review our full disclosure.

REFLECTED INDICES

S&P Composite 1500® Index combines three leading indices, the S&P 500®, the S&P MidCap 400®, and the S&P SmallCap 600® to cover approximately 90% of the US market capitalization. It is designed for investors seeking to replicate the performance of the US equity market or benchmark against a representative universe of tradable stocks. Investors cannot invest in an index.

MSCI ACWI ex USA Index captures large and mid-cap representation across 22 of 23 Developed Markets (DM) countries (excluding the US) and 23 Emerging Markets (EM) countries. With 1,859 constituents, the index covers approximately 85% of the global equity opportunity set outside the US. Investors cannot invest in an index.

Bloomberg Barclays Global Aggregate ex-USD Index is a measure of global investment grade debt from 24 local currency markets. This multi- currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. Investors cannot invest in an index.

Bloomberg Barclays High Yield Corporate Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Barclays EM country definition, are excluded. Investors cannot invest in an index.

Bloomberg Commodity Indices are a family of financial benchmarks designed to provide liquid and diversified exposure to physical commodities via futures contracts. The Bloomberg Commodity Index (BCOM) is a highly liquid and diversified benchmark for commodity investments.

Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed- rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass- through), ABS and CMBS (agency and non-agency). Provided the necessary inclusion rules are met, US Aggregate eligible securities also contribute to the multi-currency Global Aggregate Index and the US universal Index, which includes high yield and emerging markets debt. The US Aggregate Index was created in 1986 with history backfilled to January 1, 1976. Investors cannot invest in an index.

Bloomberg Barclays 1-10 Year US Government Inflation-Linked Bond Index tracks the 1-10-year inflation protected sector of the United States Treasury market. Investors cannot invest in an index.

Bloomberg Barclays US Treasury 1-3 Year Index measures the performance of public obligations of the US Treasury with maturities of 1-3 years, including securities roll up to the US Aggregate, US Universal, and Global Aggregate Indices. Investors cannot invest in an index.

Bloomberg Barclays US Treasury Bellwethers 3 Month Index is an unmanaged index representing the on-the-run (most recently auctioned) US Treasury bill with 3 months’ maturity. Investors cannot invest in an index.