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MCF Weekly Capital Market Review - December 23rd, 2019

The House passed the US-Mexico-Canada (USMCA) trade deal which is expected to pass the Senate at the start of 2020.[1] It’s a positive development that trading partners are coming together rather than apart, but the economic impact leaves much unchanged from the prior NAFTA agreement. This comes on the heels of a “Phase One” trade deal with China, which is yet to be signed, although both sides are still publicly declaring a coming deal[2] with China continuing to add to the exemption list on US products.[3]

These breakthroughs come amid a flurry of other legislation that could easily spiral into disruptive scenarios. Last week, the House voted on party lines to pass two articles of impeachment against Trump. Trump also signed into law a large defense bill, which sanctions Turkey and Russia, among other things.[4] On impeachment, the vote is a partisan symbol of protest (no single House Republican voted to impeach) and Democrats would need 67 votes to convict in the Senate (against a Republican majority of 53). So far, it has made a Trump re-election more likely. The odds of a Trump re-election on September 25 (the day after the impeachment inquiry was launched) sat at 43%; those same odds now sit at 50%.[5] For better or worse, economic and trade policies for the past three years are getting more and more likely to extend into the next five years rather than one.

The defense bill could generate countersanctions by Turkey and Russia against the US. It has also generated more animosity with countries such as Germany and China. The Russian sanctions target a pipeline that would transport oil to Germany, which relies heavily on Russian energy; the sanctions may impact their access to energy. This comes a few weeks after Trump proposed tariffs on French products in retaliation for a 3% tax on digital revenues. The European Union (EU) is the largest exporter to the US after China[6], so a trade war with the EU could have lasting impact, and both sides have plenty of reasons for one. In addition, the bill adds tension to talks with China, who alleges it is “distorting and smearing” issues relating to Taiwan, Hong Kong, and prohibited Chinese products, and denounce it for creating the US Space Force to weaponize space.[7] 

Overall, equity markets marched on to another positive week. Commodities have seen a steady climb so far this month with oil exceeding $60/barrel.[8] The S&P 500 year-to-date tops 31% despite the growing rhetoric of slowing growth and fears of recession. The impact of the trade wars put a noticeable dent into emerging market returns which lag all other major equity indices year-to-date, although that return is still above 16%.

PMI composite showed modest growth for both manufacturing and services. Huge gains in housing starts and permits in November echoed the strong sentiment in the housing market index for December. Industrial production rebounded after a 2-month hit. The JOLTS report also bounced back with a strong increase in job openings for October. The Fed business outlook survey fell flat for December but consumer sentiment held steady.[9]

This week will feature releases on durable goods orders, new home sales, and jobless claims.

INDEX RETURNS

[9] 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.

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.