Is Central Bank Easing Uniquely American?07-30-2019 |
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 07/26/19. Rates and Economic Calendar Data from Bloomberg as of 07/26/19. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
Global capital markets were mixed on the week, with International equities lagging and U.S. equities pulling ahead. In the U.S., the S&P 500 Index pushed ahead to a level of 3026, representing a gain of 1.66%, while the Russell Midcap Index gained 1.69% for the week. The Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned 2.02%. On the international equities front, developed markets moved 0.20% lower, while emerging markets lost 0.75%. Finally, the 10 year U.S. Treasury yield moved modestly higher from 2.05% to 2.08%.
With the Federal Reserve expected to decrease the Federal Funds Target Rate on Wednesday, July 31st, we thought it might be useful to put this into a global context and clear up a few uncertainties that we’ve heard from investors. Is the Federal Reserve a central bank? What is a central bank? Do other countries/regions have central banks, and if so, are they “easing” as well?
To start, the Federal Reserve is the central bank of the United States, and Bloomberg defines a central bank as “…a monopolized and often nationalized institution given privileged control over the production and distribution of money and credit. In modern economies, the central bank is usually responsible for the formulation of monetary policy and the regulation of member banks.” Typically each country, or economic union, has its own central bank that is responsible for those regions monetary policy. The U.S. has the Federal Reserve, while Japan has the Bank of Japan, the U.K. has the Bank of England, and the European Union has the European Central Bank.
Each of these independent entities is tasked with setting an appropriate overnight lending rate given current economic conditions; perhaps lowering rates if conditions are poor and increasing rates if conditions are robust for example. At the current juncture, the Federal Reserve is far from alone in the easing camp. In fact, nearly every major central bank has signaled that they have already provided some level of monetary stimulus (easing) or will be ready to do so in the near future. The chart depicts the balance sheets of three of the worlds largest central banks: the Federal Reserve, the Bank of Japan, and the European Central Bank. All three are anticipated to either increase asset purchases or decrease sales of currently held assets; both actions are considered stimulative from a monetary policy perspective.
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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Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
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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.