MCF Weekly Capital Market Review - February 3rd, 2020
Equity markets were in the red again last week on renewed concerns of the coronavirus outbreak. The number of confirmed cases is now at 17,485 with 362 of those fatal.[1] The World Health Organization (WHO) declared the outbreak a public health emergency on Thursday although it stated that travel restrictions were unnecessary. The next day, US Health and Human Services secretary Azar announced a quarantine on foreign nationals traveling to the US if they pose a risk to transmitting the virus, especially if they have been in China.[2] The Hubei province is the epicenter of cases and China is restricting travel and quarantining confirmed cases in an attempt to reduce further exposure. The outbreak is disrupting the normal flow of business, dragging down growth expectations and equity markets. Emerging Markets were the hardest hit last week, down over 5%.
Away from headlines, US corporate earnings continued with beats outnumbering misses 3 to 1.[3] New home sales fell short of estimates although still near current expansion highs. The HPI reported an increase of 2.6% for housing prices year-over-year. Consumer confidence and sentiment both posted moderate gains in January. The first reading of Q4 GDP for 2019 was in line with 2.1% consensus estimates. Employment costs continued to rise in Q4 at 2.7% year-over-year.[4] None of the moderate positivity assuaged the headline worries of the coronavirus. This week will feature releases on PMI and ISM manufacturing indices, construction spending, and the ADP employment report.
The Fed followed expectations by leaving interest rates unchanged for now, citing low inflation with core PCE at 1.6%. Fed chair Powell noted current policy is well positioned to support the 11th-year expansion with an outlook of moderate economic growth.[5] Market participants aren’t entirely convinced, and there is a growing preponderance for a rate cut as early as June with a second cut by December.[6] The futures market accurately predicted the Fed’s pivot from tightening to easing in 2019. We’ll know soon enough if the futures market will again lead the Fed this year despite its expectations and rhetoric.
We are one month into 2020 and all major equity indices are negative. The coronavirus was certainly a disruptor but there are other events that can further exacerbate uncertainty later this year. The UK formally left the European Union, successfully entering the “transition period” where both sides will negotiate economic and political terms. The successful UK exit may empower other populist parties in Europe to split away from the EU, in one form or another. In Asia, Hong Kong protestors have hampered economic growth, also throwing uncertainty into the China trade talks with the US over a hopeful Phase Two deal; this is in addition to the disruption from the coronavirus which has affected China the most. Lastly, the US faces a presidential election year with a great polarity between the two-party candidates; one can expect large market shifts as the likelihood for election (or re-election) shifts expectations and targets of future policy changes.
INDEX RETURNS
[1] https://gisanddata.maps.arcgis.com/apps/opsdashboard/index.html#/bda7594740fd40299423467b48e9ecf6
[6] 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.