Accommodative Central Banks Help Lift Stocks across the Globe
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 06/21/19. Rates and Economic Calendar Data from Bloomberg as of 06/21/19. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
Stock market participants appear to be putting the month of May in their rear-view mirrors. Global equities advanced last week for the third consecutive week and major averages in the U.S. have now even recouped what was lost during the previous month. Speaking of U.S. indexes, the S&P 500 index and Dow Jones Industrial Average gained 2.22% and 2.41% respectively for the week. The Russell 2000 index, a measure of the nation’s smaller capitalized companies, increased 1.80%. Overseas markets shared in the positive sentiment as developed markets and emerging markets gained 2.22% and 3.84% respectively. Stocks in the Eurozone in particular were given a bit of a boost as Mario Draghi, President of the European Central Bank, indicated that additional stimulus is possible. Over in fixed income, the 10 year U.S. Treasury yield fell as low as 1.97%, following dovish comments from the Federal Reserve (“Fed”), before finishing the week at 2.07%.
We’ve mentioned in previous updates that the recent run, or should we say bounce back, is in large part due to Fed Chairman Jerome Powell’s comments stating the Fed would, “act as appropriate to sustain the expansion”. This statement was taken as an indication that the Federal Funds Target Rate would be left unchanged, or even possibly reduced, aiding in continued economic growth potential. Chairman Powell also made a point to mention that labor market activity and household spending remain strong, however, rates were left unchanged as the chairman indicated that based on uncertainties in the economic outlook, as well as muted inflation, that “the case for somewhat more accommodative policy has strengthened”.
While some strategists believe that as many as three rate cuts are possible in 2019, we believe that degree of backtracking is a bit unwarranted and one or two cuts is a more likely number at this time. After all, two rate cuts of 25 basis points would bring the Fed Funds Target Rate back to the 1.75%-2.00% range. We anticipate that, for at least the remainder of the year, any economic and geopolitical updates will be carefully measured by investors as to; 1) how does this information impact global economic growth, 2) could this information lead to more accommodative policy (in the U.S. and potentially overseas as well), and 3) will the combined impact have a net positive or net negative on financial markets.
Of course there are other factors in play, such as President Trump and Chinese President Xi’s highly anticipated meeting at the G20 Summit in Japan later this week, so it becomes increasingly important for investors to stay disciplined and focused on their longer-term goals and not overreact to short term market volatility. It is also important for investors to evaluate the impact of new information on their investment portfolio strategies that, in our opinion, should be constructed and managed consistent with their own specific objectives, time-frames and tolerances for risk.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.
The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
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MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.