Market Commentary Posted on

July 2019 Market Commentary – A ‘Mid-Cycle’ Crisis?

Data Source: Bloomberg

July 2019 Highlights:

  • Global stocks (MSCI All-Country World Index or ACWI) eked out a modest return (+0.3%) led by the U.S. (S&P 500) and MSCI Japan (1.4% and 0.1%, respectively) while MSCI Emerging Markets, Asia Pacific ex Japan, and Europe lagged (-1.2%, -1.3%, and -1.9%, respectively). 
  • At the end of the month, the U.S. Federal Reserve (“Fed”) moved to cut its benchmark rate from 2.25-2.50% to 2.00-2.25% and announced they would end the runoff of the Fed balance sheet ($3.8 trillion) two months earlier than anticipated, effectively ending quantitative tightening. 
  • Equity markets sold off at the end of the month when the Fed signaled that the July rate cut would not likely represent the start of an extended series of rate cuts as the Fed felt that current economic conditions did not warrant a more dovish course. 
  • U.S. large caps outperformed small caps although this performance differential narrowed towards the end of the month, likely due to the strong U.S. dollar. Pure Growth outperformed Pure Value, but both underperformed the cap-weighted S&P 500.
  • Among risk factors, Quality outperformed while High Dividend lagged.  Quality continues to benefit from a narrow growth environment where a handful of companies are generating higher growth in a slowing economy.
  • Within fixed income, emerging market debt outperformed major segments despite local currency weakness versus the U.S. dollar.  U.S. investment grade returned 0.2% and got a boost at the end of the month following the Fed July meeting.  U.S. credit risk also continues to ride the coattails of a dovish Fed with credit spreads narrowing to 1-year lows. 
  • The 10-Year U.S. Treasury Yield finished nearly unchanged at 2.04% versus 2.00% at the beginning of July.  However, the 2-10 Year Term structure flattened to the mid-teens basis points as fixed income investors start to price in a deflationary scenario resulting from a less-than-dovish Fed and a strong U.S. dollar. 
  • Communication services, technology and consumer staples led U.S. sectors due to strong 2nd quarter earnings releases from key benchmark constituents.  Energy and materials underperformed even though commodity prices held up in the face of a strong U.S. dollar.
  • The Fed seems to be caught in a vortex where it must set rate policy and pull monetary levers largely in reaction to what its global central banking peers are implementing, lest a strong U.S. dollar sends global financial conditions over the cliff.  For now, the Fed has assured us that all that is needed is a ‘mid-cycle adjustment’, although it feels increasingly more like a mid-cycle crisis.

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By: Benjamin Lavine