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MCF Weekly Capital Market Review - July 15th, 2019

The Dow Jones Industrial Average reached new highs, closing above the 27,000 mark for the first time last week. The S&P 500 also hit a milestone, closing above the 3,000 mark. Although large caps were slightly positive for the week, all other major equity indices were down. The current US economy is in its longest recorded expansion in history, now aged more than a full 10 years[1] and still going. This expansion has been different in many respects, notably with a lower average GDP growth rate of 2.3% since the current expansion began in Q3 of 2009.[2] The average GDP growth rate for prior expansion periods since 1948 was 3.8%.[3] Furthermore, interest rates were effectively held at 0% for 7 full years (Dec 2008 – Dec 2015[4]) following the recent recession, leading to the current low interest rate environment and an extremely flat yield curve compared to other economic expansions.

J. Powell’s testimonies before the US House and Senate reiterated the Fed’s outlook of solid growth, strong labor markets, and increasing inflation, but also recognized increasing uncertainties. A standout point included an admission that both the neutral interest rate and natural unemployment rate are lower than previously thought, leading to recent policy that has been less accommodative than intended.[5] Whether the Fed intends to correct this with a more accommodative stance remains to be seen, but nonetheless market participants widely are expecting a rate cut at the July 31 FOMC meeting. The Fed certainly can make an argument for lowering interest rates given a lower neutral interest rate than prior periods and slack in the natural unemployment rate.

Core CPI and PPI showed a pickup in inflation, with both measures above 2%. The Fed’s preferred inflation gauge is PCE (personal consumption expenditures) and increasing CPI/PPI can be a positive sign of PCE increasing toward the Fed’s 2.0% goal. Inflation below this goal is one factor that has led to the Fed’s intended “patient” and accommodative stance since first hiking in December 2015. The Fed certainly can make an argument for holding interest rates given seemingly increasing expectations of inflation and the Fed’s positive economic outlook.

This week should be busier in terms of market movers. We likely will see a shift in focus to corporate performance as earnings season comes into full swing. Plenty of indicators also will be released, ranging from Retail Sales to Business Outlook Survey to Consumer Sentiment.


[3] Bloomberg, LLP

[5] https://www.cnbc.com/2019/07/11/the-fed-chairman-says-the-relationship-between-inflation-and-unemployment-is-gone.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.

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.