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MCF Weekly Capital Market Review - August 19th, 2019

News of the yield curve inversion vanished as quickly as it appeared with the two-year yield falling more than the ten-year to reverse the inversion.[1] Equity markets stabilized after the large drop on Wednesday and rallied back some of the losses. It was still a negative week, but it has not morphed into a sustained downturn pushing into bear territory. Time will tell, but Friday’s rally was an encouraging sign.  US Equities (S&P 500 Index) have enjoyed an unconventional bull run since 2009 with historically low equity volatility and few interruptions to its upward trend. Until last year, large downward swings commonly experienced with equity investing were uncharacteristically infrequent. Below are the peak-to-trough drops since the beginning of 2018 (based on daily intraday prices for the S&P 500 Index, not including dividends):

Time Period

Percent Drop

1/26/18 – 2/9/18

-11.8%

3/13/18 – 4/2/18

-8.9%

10/3/18 – 12/26/18

-20.2%

5/1/19 – 6/3/19

-7.6%

7/26/19 – 8/5/19

-6.8%

8/13/19 – 8/15/19

-4.0%

Source: Bloomberg, LLP 

Investors should focus on the long-term picture. Although equity markets have experienced periods of significant short-term losses, those who remained invested through the turbulence were rewarded with attractive long-term returns. Despite recent drawdowns, investors were still rewarded for taking equity risk as the S&P 500 Index has an annualized three-year return of 11.95%. Volatility is expected to continue given unresolved geo-political events (i.e. US-China, Brexit) coupled with mixed economic signals.

Both CPI and retail sales were very strong. Production and manufacturing continued to show weakness. Consumer sentiment was weaker-than-expected, likely the result of weakening global growth signals and pending trade disputes creating economic uncertainty. Trump made a vague comment on US-China talks, saying “We are doing very well with China, and talking!” which followed an earlier plea to meet with President Xi personally regarding the protests in Hong Kong.[2] Regardless, it is likely that we are still far off from a resolution. Negotiators have agreed to meet in about a week.

This week will be very light on economic indicator releases. The Fed will release its minutes from last meeting and Fed Chair Powell will speak at Jackson Hole. Markets are pricing in three more rate cuts through the end of the year[3] and Powell will have the opportunity to alter or confirm these expectations in preparation of the September 18 Fed meeting. The other indicator to watch will be Trump’s social media posts on US-China trade talk developments.

[3] https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.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.