MCF Weekly Capital Market Review - February 17th, 2020

Equity markets shrugged off coronavirus concerns until Thursday when China reported a large bump in confirmed cases after an apparent tapering. There are now 71,811 confirmed cases and 1,775 confirmed deaths from the latest outbreak,[1] now named Covid-19. All eyes are on China to see how Covid-19 will affect economic growth for the emerging market giant. Chinese state-sponsored media posits GDP growth remaining above 5% for Q1 2020 and still hitting 6% for the year.[2] In a region of the world where information is less than forthright, there’s still the possibility of surprises surrounding Covid-19 and its impact on the global economy. Despite the surprises, all broad equity indices were positive for the week.

Fed Chair Powell’s testimonies last week reiterated a current policy that is appropriate to sustain the current economic expansion. Despite a plurality of market participants that waver between one to two rate cuts this year,[3] Powell downplayed these expectations, arguing for action only if a sharp tightening in financial conditions begins to show up in the data. He noted the risks posed by the coronavirus on US businesses. Powell expects inflation closer to two percent but forewarns that low productivity growth and a low interest rate environment are here to stay.

An unequivocal reminder of the low interest rate environment is the $13.2 trillion of negative-yielding bonds outside the US, a number that peaked at $16.8 trillion last year. This translates to over 41% of bonds outside the US having a negative yield (instead of earning interest, investors are paying interest). Although US bond market yields remain positive, they are driven lower as international investors shift to the US in search of higher, positive yields than available at home. The 10-year US Treasury yield now sits at 1.59%, a far cry from the high of 3.24% in November 2018.[4]

_{Source: Bloomberg}

Core CPI reflects subdued inflation, remaining at 2.3% year-over-year. Jobs openings continued their yearlong trend downward though the number of openings is still high after a record year in 2018.[1] Retail sales posted moderate gains for January. Consumer sentiment also showed a slight pickup for February. US corporate earnings beats outnumber misses by about three to one.[2]

This week will feature releases on housing starts, existing home sales, PPI, and the Fed business outlook survey.

INDEX RETURNS

^[1]^{https://fred.stlouisfed.org/series/JTSJOL}

^{[2] https://www.streetinsider.com/ec_beat.php}

^{[1] https://gisanddata.maps.arcgis.com/apps/opsdashboard/index.html#/bda7594740fd40299423467b48e9ecf6}

^{[2] https://www.globaltimes.cn/content/1178394.shtml}

^{[3] https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html}

^{[4] https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/TextView.aspx?data=yieldYear&year=2018}

^{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.}