Key Market/Economic Observations
U.S. Growth Slows while Markets Continue to Climb
Domestic equities extended their 2019 gains in July as the S&P 500® pushed to another all-time high, eclipsing the 3,000 mark and ending up more than 21% for the year (as of July 26). Helping drive the move higher are expectations the Federal Reserve (Fed) will cut interest rates at the end of the month, ending its more than four-year tightening cycle, and ushering in an easier outlook on monetary policy. The Fed’s dovish pivot has helped boost investor sentiment and multiple expansion, which has accounted for most of this year’s positive equity performance. Additionally, we are about halfway through second-quarter earnings season and results thus far have been encouraging, supporting our positive overall outlook for 2019 earnings growth of 5%.
International Developed Markets
Central Banks Shifting Back toward Accommodative Policy
Central banks around the globe are debating the near-term benefits of combating a global slowdown versus the longer-term costs of prolonged easy money. The Fed, European Central Bank, and Bank of Japan have all telegraphed interest rate cuts amid heightened trade uncertainty and looming geopolitical tensions. We continue to believe this apparent shift toward forecast dependence rather than data dependence underscores just how much headline macro concerns have weighed on sentiment, even when the hard data do not yet seem to reflect a material deterioration in the fundamental backdrop.
Pockets of Positive Performance Limited by Dollar Strength
The MSCI Emerging Markets (EM) Index is on pace for its sixth positive monthly return for the year, compared with just three positive months in 2018. Performance strength in EM Asia was offset by issues in Europe and Latin America, primarily as markets adjusted to dollar strength and expectations of a Fed rate cut. Given these idiosyncratic risks, we continue to recommend allocations to EMs in actively managed strategies as the index ranks in the bottom half of its peer group both for the month and the year.
Commodity Risks Shift Downward with Yields amid Less Inflationary Pressure
The Bloomberg Commodity Index fell over 1% in July, in line with declining inflation pressures reflected in Treasury yields and futures markets priced for Fed easing. Within the commodity index, a similar theme has emerged. Copper, tin, and crude oil prices have weakened over demand concerns and a lack of resolution in China/U.S. trade negotiations while precious metals have exhibited strength. As a result, the copper-to-gold ratio, a measure of risk sentiment, declined further over the course of the month. U.S. oversupply and declining global demand will likely keep a lid on crude oil prices, in our view, which increasingly depend on geopolitics and OPEC-Plus cuts for support. Overall, we believe slower economic growth and trade tensions should help keep inflation relatively tame over the next 6-12 months, which we expect to be supportive of personal consumption, following better-than-expected second-quarter U.S. GDP data.
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