The Fed May Let the Good Times Roll
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 06/07/19. Rates and Economic Calendar Data from Bloomberg as of 06/07/19. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
On the heels of the worst month of the year in terms of stock market returns, global equity markets came roaring back to kick off June. In the U.S., the Dow Jones Industrial Average gained 4.77%, the S&P 500 Index rose 4.46%, and the Russell 2000, a measure of the nation’s smaller capitalized companies, increased 3.36%. International markets shared in the positive sentiment as developed markets and emerging markets gained 3.24% and 1.04% respectively. Even though the equity markets rebounded sharply, U.S. treasury yields remained low as investors still see value in their perceived safety during geopolitical uncertainty and a slowing global economy. The 10 year U.S. Treasury closed the week yielding just 2.09%.
So what was the primary driver of stock market performance last week? It wasn’t because of any easing of U.S. – China trade tensions. It wasn’t because there was any positive news coming out of the Friday jobs report. Instead, it was likely due to investor focus turning to the Federal Reserve (“Fed”) in hopes they may be willing to step in ahead of what is believed by many to be an impending recession and potentially ease policy (i.e. cut rates) so investors can have a bit more time on this ride up. Federal Reserve Chairman Jerome Powell noted that ongoing trade tensions are being closely monitored, as they have put pressure on global economic growth, and that the Fed will “act as appropriate to sustain the expansion”. Investors interpreted this as a potential sign that rates may be cut and a rally ensued. As it stands, according to the CME Group, the market is pricing in over a 95% chance of at least one rate cut in 2019. Consistent with this newly found sentiment, the Labor Department’s employment report last Friday revealed non-farm payrolls only increased by 75,000 in the month of May, significantly missing estimates of 175,000. Stocks rallied after the release of the report as the disappointing news only strengthened the case for a potential rate cut.
In the coming weeks, we could have some clarity on the issues at hand as the Federal Open Market Committee (FOMC) is scheduled to meet June 18-19 and President Trump and President Xi may meet in person at the G20 Summit in Japan later this month. In the face of potential continued periods of heightened volatility throughout the remainder of 2019, we encourage investors to stay disciplined and work with experienced financial professionals to help manage their portfolio through various market cycles within a well-diversified framework that is consistent with their own specific objectives, timeframes and tolerances for risk.
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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.
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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.