The Federal Reserve & Brexit Take Center-stage Again
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 10/18/19. Rates and Economic Calendar Data from Bloomberg as of 10/18/19. 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 equity markets enjoyed another week of positive performance. In the U.S., the S&P 500 Index rallied to a level of 2986, representing a gain of 0.55%, while the Russell Midcap Index rose 0.56% for the week. The Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, followed suit climbing 1.57%. On the international equities front, developed markets moved 1.24% higher, while emerging markets gained 1.27%. Finally, the 10 year U.S. Treasury yield held firm at 1.76%.
From now until the end of October investors will likely pay special attention to Brexit related developments, in addition to announcements by the Federal Reserve regarding short-term interest rate policy and the size of their balance sheet. Last week investors were graced with an announcement of progress as it relates to the ongoing Brexit saga. In a joint press conference, U.K. Prime Minister Boris Johnson and European Union President Jean-Claude Juncker proclaimed that the two parties had finalized terms regarding the United Kingdom’s’ exit from the European Union. With this crucial step in the process determined, Prime Minister Johnson is now able to bring the agreed-upon terms to a vote in Parliament, where a “yes” vote would avoid the repercussions of a “hard-Brexit” on the October 31st deadline. Unfortunately, as of the time of the writing of this update, the agreement appears to have stalled in Parliament. Nonetheless, odds-makers believe that there is a 70% chance of the ratified Brexit deal passing and the U.K. exiting the European Union by the October 31st deadline.
Brexit isn’t the only topic moving markets in October as the Federal Reserve is expected to deliver interest rate guidance next week. In fact, capital markets (as of Monday’s market close) are pricing in at least an 85% chance that Federal Reserve Chairman Jerome Powell announces another 25 Bp (0.25%) cut to the Federal Funds Target Rate at the October 30th Fed press conference. In a previous market update titled, “Should the Federal Reserve have Cut Interest Rates by another 0.25%?”, we laid out evidence to support our view that further cuts to the Federal Funds Target Rate are unwarranted and arguably imprudent at this time. As you’d expect, we hold the same sentiment toward a rate cut in October or December. Regardless, investors should anticipate the potential for increased volatility following next Wednesday’s conference.
As we’ve said before, we’re moving into uncharted, and potentially more volatile, waters which is why we continue to encourage investors to stay disciplined and work with experienced financial professionals to help manage their portfolios through various market cycles within an appropriately 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.
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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.