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MCF Weekly Capital Market Review - November 4th, 2019

Last week, the Fed cut rates 25 basis points for the third time this year. These cuts were widely anticipated by market participants, who are now betting on another cut late next year.[1] The Fed removed the phrase “will act as appropriate,” shifting to a data-dependent view with expectations that the most likely outcome will be moderate growth.[2] In other words, the Fed has completed its “mid-cycle adjustment” or insurance cut, plans to pause rate changes for now, and further action will only be warranted if moderate economic growth expectations fail to materialize. Powell also noted that risks from trade tensions and a “no-deal” Brexit have decreased while slowing global growth remains a concern.[3]

The 10-year minus 2-year Treasury yield spread has positively widened over the past two months, further away from the August yield curve inversion.[4] It’s a positive sign for bullish investors insisting that economic expansion isn’t over. Positive news is further extended from US Q3 corporate earnings season, with 73% of companies reporting an earnings beat.[5] The S&P 500 continued to touch all-time highs, closing above 3,066 on Friday.

US-China trade talks linger but are showing progress. A comprehensive deal is being divided into phases. According to Trump, Phase One is ~60% of the total deal[6] and is expected to be signed this month. It covers some items of intellectual property (copyrights, trademarks, piracy) and limits on foreign ownership in China. It does not address other major issues, such as forced technology transfers, cybersecurity, the social credit system, and the blacklisting of Huawei products, which are expected to appear in Phase Two (or Three if necessary).[7] As always, a re-escalation could occur as it did earlier this year.

UK Prime Minister Boris Johnson was unable to pass a Brexit resolution, forcing the UK to request a three-month extension from the EU to January 31, 2020.[8] As a result and with rare help from the opposition, Johnson moved to secure an unscheduled (“snap”) election for December 12 in an attempt to change the composition of members of Parliament, and therefore change voting results on Brexit legislation.[9] Also in Europe, president Draghi of the European Central Bank (ECB) finished his 8-year term and was replaced by Christine Lagarde, who may shift monetary policy.[10] 

The first estimate of Q3 GDP came in at 1.9%, better than the expected 1.7%. August home prices were on the lower end of expectations but pending home sales for September far exceeded upper estimates. Consumer confidence for October was slightly down. Inflation measures remain muted and personal income and spending are hitting their moderately positive expectations.[11]

This week’s releases will include reports on factory orders, JOLTS jobs, and labor productivity and costs.

[11] https://us.econoday.com/byweek.asp?cust=us

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.

S&P GSCI is a composite index of commodity sector returns which represents a broadly diversified, unleveraged, long-only position in commodity futures. The S&P GSCI is intended to provide exposure to broad-based commodities. Investors cannot invest in an index.

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.