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MCF Weekly Capital Market Review - December 16th, 2019

To no surprise, the Fed decided to leave interest rates unchanged. The committee continues to recognize sustained economic expansion and strong labor markets, but lingering concerns are business investment, exports, and subpar inflation. It even added that longer-term inflation expectations remain low,[1] a sign that no rate hike is expected through 2020 (the typical action for combating inflation). Market expectations have been largely aligned with this sentiment for months now, assigning no chance of a hike (but a wavering chance of an additional cut) by the end of 2020.[2]

Britain held its general “snap” election on Thursday December 12, a failsafe triggered by another delay with a Brexit (leave EU) resolution before the prior October 31, 2019 deadline. If there was any confusion as to where British voters still stood on the Brexit issue, that confusion is now removed with the Conservative (pro-Brexit) party securing a landslide victory over anti-Brexit parties.[3] Now with a sizeable majority in the House of Commons, Prime Minister Boris Johnson likely will have a much easier time passing a Brexit bill before the new January 31, 2020 deadline. The odds of Brexit being revoked dropped overnight Thursday from 20% down to a mere 1%.[4] The day after, both the FTSE 100 (UK large cap stock index) and the British Pound enjoyed huge rallies.[5],[6]

At the World Trade Organization (WTO), the U.S. continued its policy of refusing to fill appellate judge vacancies, citing an inappropriate compensation structure of judges and failure to issue rulings within the 60-90 days as promised,[7] which is ineffective in countering unfair trading practices, especially with China.[8] The move shuts down the WTO appeals process, as the one remaining judge is insufficient for the body to issue rulings. International trade existed before the WTO and disputes can and have been resolved outside of the WTO framework, so the situation is not of hopelessness but rather one of uncertainty. The WTO spat and Brexit are reflective of the times, with nationalism gaining traction over supranationalism. This is causing major shifts in policy, and major shifts create uncertainty for market participants.

A result of nationalism (in this case “America First”) has been the continuing trade war with China. There appears to be progress as both sides “have agreed on the wording” of a Phase One deal, according to Chinese state-sponsored media.[9] Both sides halted the proposed tariffs for December 15. In addition, the U.S. is cutting tariffs in half for $120 billion of Chinese goods (while 25% tariffs remain on $250 billion). For the other side, China will increase purchases from the US to $200 billion over 2 years; this number was $130 billion in 2017 before the trade war. Phase One will include some protections on patents, trademarks, copyrights, and some pledges on reducing forced technology transfers for US companies in China. There are also pledges to prevent currency devaluation and means of enforcing the provisions of the deal.[10] It’s a major positive breakthrough for market participants, if both sides follow through on the apparent agreement. However, many of the issues addressed were prior pledges made by China that it failed to enforce.

International Developed equities rallied on election results, and Emerging Market equities rallied on the Phase One trade deal. Core CPI held steady at 2.3% year-over-year while PPI was weaker-than-expected, a sign of slowing inflation. Jobless claims last week jumped up higher than expected, a shift from prior weeks. Retail sales showed a continued slowing, although still positive.

This week will feature releases on PMI, housing, industrial production, personal income and outlays, and consumer sentiment.

INDEX RETURNS

[10] https://www.reuters.com/article/us-usa-trade-china-details-factbox/whats-in-the-u-s-china-phase-one-trade-deal-idUSKBN1YH2IL

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.