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MCF Weekly Capital Market Review - June 24th, 2019

The US-China trade dispute is beginning to show signs of an eventual reconciliation as Trump announced this past Tuesday morning that he would have an extended meeting with Xi at the G20 summit June 28-29 in Osaka[1]. Teams from both sides will continue the negotiating process in the days leading up to the summit. Markets responded positively last week on this renewed optimism.

The other big headline was the Fed keeping interest rates unchanged for now, as widely expected. This included a shift in language and in expected forecasts compared to recent meetings. The word “patient” was absent in this release and had a reiteration of Powell’s June 4 comments to “act as appropriate to sustain the expansion,” citing increased uncertainty in outlook[2]. The new dot plot also indicates a divided Fed with 7 of 17 members now expecting 2 rate cuts by the end of the year but 8 members still expecting no change[3]. Although the Fed shift was starkly dovish, market participants remain even more so. The majority market opinion is now for 3 rate cuts this year[4].

US Treasury yields across the board have been steadily falling for the past 2 months[5] in anticipation of coming rate cuts due to economic uncertainties. These uncertainties and hints of a slowing economy are not contained to the US. Draghi (European Central Bank) and Kuroda (Bank of Japan) made similar comments, that monetary easing may recommence if inflation continues to disappoint[6]. Equity markets have responded positively for the most part, but there is little reason to rejoice: monetary easing occurs because economic growth is slowing. Slowing economic growth is generally a detractor to a firm’s expected value, which in turn reduces an investor’s expected return when investing in that firm. The concern as an investor in the current environment is investing in bonds with historically low yields or in equities with falling growth prospects.

Last week’s releases of Business Outlook Survey and Housing Market Index support the Fed’s perspective of an economy experiencing slowing but moderate growth[7]. Despite the negativity and uncertainties, the S&P 500 still hit an all-time high on Thursday, June 20th, closing at 2,954 and surpassing its pre-trade war high from April 23. 

Plenty of economic indicators are on the calendar to digest this week, including Consumer Confidence, Durable Goods Orders, International Trade, GDP, and Personal Income and Outlays.


[4] CME FedWatch Tool

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 a 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.