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MCF Weekly Capital Market Review - July 23rd, 2019

Earnings season has begun in earnest and positive surprises are outweighing the negative surprises so far. Despite the mostly positive beats, US equity markets were down over 1% for the week. Forward earnings estimates came down earlier this year, tempering expectations of corporate growth and arousing suspicion of a slowing economy. This year has also faced growing uncertainty surrounding geo-political events and central banking policies. Positive earnings would be a partial salve against these negative developments.

The large tech giants will be closely watched as they have become the dominant return drivers for market indices. As of 6/30/2019, the top 10 companies in the S&P 500 by market cap comprise over 22% of the index.[1] The tech giants (Microsoft, Apple, Amazon, Alphabet, Facebook) dominate this list. Microsoft has already reported stronger than expected earnings and the latter three will release their earnings this week. If the tech giants can follow Microsoft’s lead, it would help create a positive backdrop for equity performance going forward given tech’s concentrated effect on the market.

Fed Chair Powell last week appeared to support the case for a coming rate cut. Concerns of creeping inflation were downplayed. Powell posited that “inflation pressures remain muted” and that the personal consumption expenditures (PCE) index is estimated at 1.7% for the past year, short of the 2% target.[2] NY Fed’s John Williams also piled on, stating “It’s better to take preventative measures” and restating Powell’s admission of a lower neutral interest rate.[3] PCE may not be reflecting inflation, but other traditional inflation measures tell a conflicting tale; the price of gold has quietly increased over 16% in the past year.[4]

Last week’s indicators were mixed overall. Retail sales saw a pickup, housing starts were lower than expected, and consumer sentiment held steady. Industrial production was flat but with a strong rebound in manufacturing after this year’s slowdown. The Beige Book release was largely a reiteration of June’s release: modest growth, strong labor markets, and stable inflation. The Fed Business Outlook Survey had a big reversal against its sluggish June figure, pointing to signs of very strong demand.[5]

This week will continue filling in the picture of corporate health as more earnings are released. Only a few indicators of existing and new home sales, durable goods, and GDP reports are set to be released this week. Nascent headline risks that have the potential to blossom into large market movers are currently an escalation of US-Iranian tensions and re-emerging debt ceiling negotiations. Outstanding items waiting for closure include US-China trade negotiations, US-Mexico-Canada trade agreement ratification, and clarity of probable Brexit outcomes.


[1] Bloomberg, LLP

[2] https://www.federalreserve.gov/newsevents/speech/powell20190716a.htm

[3] https://www.newyorkfed.org/newsevents/speeches/2019/wil190718

[4] Bloomberg, LLP

[5] https://www.econoday.com/

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.