Global Macro Environment

Global Fundamentals Modestly Improving
The US consumer continues to be the workhorse for the economy. Real GDP in the third quarter was revised higher to 2.1% from 1.9% and the Atlanta Fed’s tracking estimate for the fourth quarter is currently at 1.3%, up from 0.3% as of November 16. Friday’s strong job report showed robust hiring in November as employers added 266,000 jobs and the unemployment rate matched a fifty year low. Another key support is US housing, as new home sales remained in an uptrend with October reporting 733,000. The risk continues to be trade and the November release of the Institute of Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) is signaling that the US is feeling some pressure. The US ISM PMI declined back to the cycle low at 47.2 from 48.3 in October.

In Europe, subtle improvements in German manufacturing data has been temperately hopeful. Germany’s heavy export economy is seen by investors as a good barometer of global activity. For most of the year Germany has been dealing with a slowdown in China, possible auto tariffs from the US and Brexit, so the recent improvements have been welcomed by investors. Improvements were also seen in China’s economy as the Caixin services PMI rose to 53.5 in November, a seventh month high, while the manufacturing PMI rose to 50.2 ending six straight months of contraction.

Fed Moving On To 2020
The Federal Reserve has lowered the fed funds target rate three times in 2019, but indicated a likely pause in December. The possibility of an insurance cut in the first quarter of 2020 has been mentioned in the media, however, it would take a very weak December jobs report and deteriorating US consumer data to be seriously considered.

Trade Intensification
The last few weeks the rhetoric between the US and China indicated that the two sides were close to a deal, or at least a “phase one deal.” The steel and aluminum tariffs announced on December 2 suggest that this might not be the case. Rationale for the tariffs, delivered by the President via twitter, was over currency devaluation but looking past the 240 character tweets would suggest something else. Brazil and Argentina, the countries targeted by President Trump via the tariffs, are set to sign agricultural deals with China. This would make China less dependent on US farmers, whom the President has vowed to protect.

On the same day as the steel and aluminum tariffs were announced, the Trump administration also proposed tariffs of up to 100% against $2.4 billion of French imports. The administration said the tariffs are justified because of a new digital-services tax imposed by France that weighs heavily on US technology companies.

These new trade developments will certainly not help business confidence.

Market Observations

US Equities
The S&P 500 gained 3.6% in November bringing the year-to-date performance to 27.6%. Large cap growth led value on a monthly basis but value has outperformed growth over the prior quarter (8.3% vs. 7.4%). Overall small cap performance (+4.1%) was strong in November as well bringing the year-to-date performance to 22.0%. Similar to large cap, small cap growth led value last month, but the value outperformance over growth is even wider on a three month basis (10.2% vs. 8.0%). Information technology (+5.4%) and financials/healthcare (+5.0%) led all the sectors in November, while utilities (-1.8%) was the sole sector with negative performance.

International Equities
Developed international markets had a positive month, unlike emerging markets, as the MSCI EAFE gained 1.2% and MSCI EM fell -0.1%. Within regional developed markets, Europe outperformed Australasia/Far East (1.5% vs. 0.5%). Protests, social unrest and political turmoil continue to hurt Latin American emerging markets. The region was down -4.1% in November.

Fixed Income
The Bloomberg Barclays US Aggregate Index was slightly down for November at -0.1%. The US ten year yields are up about 10bps since the end of the third quarter. Investment grade corporate credit (+0.2%) and high yield (+0.3%) continue to perform well. In the municipal space, favorable supply-demand dynamics, solid state and local balance sheets and net rating upgrades vs. downgrades all look to be possible tailwinds.

Real Assets
Natural resources (+1.6%) had a positive month while MLPs (-5.8%) and real estate (-1.2%) fell. US crude oil has traded between $50 and $60 a barrel for a majority of the last six months. Energy analysts say this range benefits both producers and consumers. Globally, the Organization of the Petroleum Exporting Countries (OPEC) met last week in Vienna. Saudi Arabia is pushing OPEC to continue with the previously agreed upon output cuts but said they will boost production if other members do not adhere to the agreement.

This Financial Landscape represents the consensus of the Oxford Investment Fellows as of 12.5.19 and is subject to change at any time due to market or economic conditions or other factors. Statistical data is derived from third party sources believed to be reliable and has not been independently verified by Oxford. The information above is for educational and illustrative purposes only and does not constitute investment, tax or legal advice.