By: Nick Newell, FRM
The US-China trade dispute continues to dominate headlines. US Large Cap Stocks (as measured by the S&P 500 Index) fell nearly 4.5% after the original tariff comments, started to recover but dropped back down near the 2800 level. Emerging Markets (MSCI Emerging Markets Index) fared much worse, falling nearly 9.0% through last Friday. The direct cost of the tariff increases is relatively small for the US, but investors remain concerned over the potential for an escalation of trade tensions that could create higher direct and indirect costs, which are difficult to forecast/measure. The latest action was a US ban on Huawei, manufacturer of Chinese telecommunications equipment, due to “unacceptable risks” from cybersecurity and spying through Huawei-manufactured devices. Both sides may use other economic items as bargaining chips, such as more tariffs or flat out bans, such as China’s rare earth materials. Given its potential for broad macroeconomic disruption, we expect volatility to continue due to uncertainty over further escalations.
Despite tariff headlines, consumer sentiment reached a 15-year high with year-ahead inflation expectations of 2.8%. The Philadelphia Fed Business Outlook Survey also beat expectations with generally solid growth readings. Jobless claims reversed a 3-week uptrend by coming in on the lower range of expectations two weeks in a row, allaying some concerns of an economic slowdown. However, the Purchasing Managers Index (PMI) and Durable Goods Orders reflect a softening in the US economy.
On the Fed front, the May 1 Federal Open Market Committee (FOMC) meeting minutes were released last week and many of the 17 members expect inflation to increase. Mostly positive economic data coupled with the latest FOMC minutes support the Fed’s forecast of a potential rate hike. However, investors are betting on increasing chances of a rate cut over the next year (see chart), believing economic fundamentals will deteriorate before the Fed’s expectations come to fruition.
This week is shortened by the US holiday (thank you to those who gave it all for our Freedom!). However, investors have plenty of economic data to digest this week, including: housing price data and Consumer Confidence on Tuesday; Investor Confidence on Wednesday; GDP, US Goods Trade Balance, jobless claims, EIA Petroleum Status, and the Fed’s Balance Sheet report on Thursday; and the week wraps up with Personal Income, Chicago PMI, and Consumer Sentiment on Friday.
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S&P Composite 1500® Index combines three leading indices, the S&P 500®, the S&P MidCap 400®, and the S&P SmallCap 600® to cover approximately 90% of the U.S. market capitalization. It is designed for investors seeking to replicate the performance of the U.S. equity market or benchmark against a representative universe of tradable stocks. Investors cannot invest in an index.
MSCI ACWI ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries (excluding the US) and 23 Emerging Markets (EM) countries. With 1,859 constituents, the index covers approximately 85% of the global equity opportunity set outside the US. Investors cannot invest in an index.
Bloomberg Barclays Global Aggregate ex-USD Index is a measure of global investment grade debt from 24 local currency markets. This multi- currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. Investors cannot invest in an index.
Bloomberg Barclays High Yield Corporate Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Barclays EM country definition, are excluded. Investors cannot invest in an index.
S&P GSCI is a composite index of commodity sector returns which represents a broadly diversified, unleveraged, long-only position in commodity futures. The S&P GSCI is intended to provide exposure to broad-based commodities. Investors cannot invest in an index.
Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed- rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass- through), ABS and CMBS (agency and non-agency). Provided the necessary inclusion rules are met, US Aggregate eligible securities also contribute to the multi-currency Global Aggregate Index and the US universal Index, which includes high yield and emerging markets debt. The US Aggregate Index was created in 1986 with history backfilled to January 1, 1976. Investors cannot invest in an index.
Bloomberg Barclays 1-10 Year US Government Inflation-Linked Bond Index tracks the 1-10-year inflation protected sector of the United States Treasury market. Investors cannot invest in an index.
Bloomberg Barclays US Treasury 1-3 Year Index measures the performance of public obligations of the U.S. Treasury with maturities of 1-3 years, including securities roll up to the U.S. Aggregate, U.S. Universal, and Global Aggregate Indices. Investors cannot invest in an index.
Bloomberg Barlclays US Treasury Bellwethers 3 Month Index is an unmanaged index representing the on-the-run (most recently auctioned) U.S. Treasury bill with 3 months’ maturity. Investors cannot invest in an index.