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MCF Weekly Capital Market Review - September 9th, 2019

Trump continues to poke at China, claiming they are “eating the tariffs” and that the US will no longer be “taken to the cleaners.”[1] China so far has been dragging out the negotiation process and digging in their heels. This strategy worked for the past year or so as most tariff threats by Trump usually ended up revoked, delayed, or contained notable exclusions before being implemented. On October 1 the US is scheduled to raise tariffs from 25% to 30% on $250 billion of Chinese goods, in addition to 15% tariffs implemented September 1 and another round scheduled for December 15 covering an additional $300 billion.[2] As policy currently stands, virtually all imports from China will be tariffed by December 15. Both sides have announced an agreement to meet in early October.[3]

One reason for China to delay pins hope on a regime change resulting from the 2020 US presidential election, and a Democrat president with a more concessionary trade negotiation process. This still leaves 16 months of Trump tariff policy, assuming this coin flip scenario is played out (betting odds are a ~44% chance of a Trump re-election[4]). Trump counters this strategy by saying a less desirable trade deal will be offered to China if they delay until then. Other reasons include China having the means to temporarily offset some of the impact, such as recently lowering bank reserve ratios[5] and undergoing currency devaluation. These mechanisms may hide the damage in the short term, but there is no long-term substitute for removing obstacles to mutually beneficial trade between countries.

Fed Chair Powell’s appearance in Zurich was another anticlimactic one for markets, mostly reiterating past comments to support the US economy and a moderately positive outlook. Market participants are widely expecting another 25 basis point rate cut[6] and Powell did little to change these expectations despite the prior rhetoric framing July’s rate cut as a “mid-cycle adjustment” rather than a series of rate cuts.[7] It was the last scheduled opportunity for Powell to provide forward guidance on Fed policy before the September 18 meeting and there is strong market consensus contrary to the Fed that we are facing a series of cuts.

Construction spending and the ISM/PMI manufacturing indices show weak areas of the economy. Despite trade tensions, imports marginally increased but exports decreased. The many labor and employment reports reflect a strong and stable labor market with hints of capacity constraints and rising wage pressures. The unemployment rate stands at 3.7% and the labor force participation rate at 63.2%.

This week’s releases include PPI and CPI, retail sales, business inventories, and consumer sentiment.

INDEX RETURNS


[7] https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20190731.pdf

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.