The “Big Three” in Action
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 08/02/19. Rates and Economic Calendar Data from Bloomberg as of 08/02/19. 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 markets suffered significant losses last week, marking the worst week of 2019. In the U.S., the S&P 500 Index, Dow Jones Industrial Average, and NASDAQ Composite retreated 3.07%, 2.59%, and 3.90% respectively. Overseas, developed markets lost 2.64% as measured by the MSCI EAFE index, while the MSCI Emerging Market Index lost 4.24%, which shouldn’t be too surprising as China makes up over 30% of this index. Consistent with the apparent “risk-off” sentiment and flight to safety, treasury yields declined across the curve as prices increased. The 10 year U.S. Treasury closed the week with a yield of 1.86%, 22 basis points lower than the previous week.
Volatility intensified across global equity markets as investors were tasked with trying to make heads or tails of the barrage of information from three key market influencers. The “Big Three” sources being the U.S. and China, as it relates to trade and tariffs, the Federal Reserve (“Fed”), and global economic data. The bulk of stock market volatility is attributable to escalating trade tensions between the U.S. and China, which has flooded into the start of this week as well. Here is a look at where we stand:
1. U.S./China Trade Tensions and Tariffs
a. President Trump announced an additional 10% tariff on $300 billion Chinese imports effective September 1
b. China retaliates by letting its currency weaken, making Chinese goods cheaper for overseas buyers, and reportedly instructing state-owned businesses to stop purchasing U.S. agricultural products
2. The Federal Reserve and interest Rate Policy
a. The Fed cut interest rates for the first time in over a decade last week, which was widely expected, leaving the target rate in the range of 2.00%-2.25%
b. The Fed will end balance sheet reductions on August 1, earlier than previously indicated
c. The Fed will monitor the labor market, inflation, and global developments when determining future rate decisions, noting their desire to sustain the current expansion
3. Global Economic Updates
a. Job, payroll, and consumer related reports remain encouraging
b. 76% of S&P 500 companies have reported a positive EPS surprise thus far for the 2nd quarter of 2019, according to FactSet
c. Global manufacturing figures continue to trend lower
Even though investors may decide to focus on the negative, we are of the belief that the global economic expansion, particularly in the U.S., will continue. Markets are already looking to rebound on Tuesday, following a Monday which marked the worst trading session of 2019. However, volatility will certainly persist and of course the possibility of additional negative headwinds exists. Therefore, we continue to encourage investors to stay disciplined and work with an experienced financial professional to help manage their portfolios through various market cycles within a well-diversified framework that is consistent with their objectives, time-frame and tolerance 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.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
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.