Global Macro Environment

Global Conditions Improving
In the US, the overall economy continues to grow, albeit at a slower pace. Strong employment, the US consumer and the housing market are the bright spots in an economy looking to navigate a soft landing. Personal consumption was up 2.4% year- over-year in November. Retail sales were also up 3.4% year-over-year in November. Lower interest rates helped the housing market in 2019 as weekly mortgage applications for home purchases have been gradually increasing the past several months. The weak spot continues to be manufacturing. Manufacturing contracted for the fifth straight month as the Institute of Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) registered 47.2 in December, a decrease from the 48.1 reading in November. The 47.2 reading is the lowest since June 2009.

The IHS Markit Eurozone Composite PMI for December was 50.9; the index remains in growth territory and up slightly from the November 50.6 reading. Manufacturing is still in contraction territory but was offset by strong activity in the service sector. China, hoping to defend against the slower growth backdrop experienced in 2019, indicated their central bank will lower its reserve requirement ratio for banks on January 6. Industrial production accelerated in November and retail sales improved, due in part to China’s e-commerce giant, Alibaba’s, record one-day sale on November 11. Globally, sustained policy easing seems to be a recurring theme early in 2020.

Fed Moving On To 2020
The Federal Reserve held the fed funds target rate steady at their December meeting after cutting the rate three times throughout the year. Fed Chairman Powell indicated he would want to see a “persistent and sustained upturn in inflation” before discussing any plans to reverse the rate cuts. Minutes from the December gathering, released on January 3, noted officials discussed risks of a broader global slowdown and US/China trade tensions.

Geopolitical Developments: US/Iran Tensions Rise & US/China Phase One Trade Deal
On Friday December 27, a US contractor was killed and four US troops were wounded when 30 rockets hit an Iraqi military base. The US retaliated by carrying out airstrikes against Kataib Hezbollah, an Iranian backed Shia militia group in Iraq, after the Pentagon determined the group was responsible for targeting Americans. Supporters of the militia then attempted to storm the US Embassy in Baghdad on New Year’s Eve. Two days later this led President Trump to authorize an airstrike that killed Qassem Soleimani, Iran’s top military commander, and Abu Mahdi al-Mohandes, commander of Kataib Hezbollah. The situation is ongoing and requires monitoring.

Right before Christmas China said it will cut import tariffs on some US products in 2020, signaling a desire to complete a phase-one trade deal. Then on New Year’s Eve, President Trump announced he would sign the phase-one trade deal on January 15 and that he would personally go to China later for talks on phase-two. China confirmed the deal and plans to send its trade delegation to the US for a few days beginning on January 13.

Market Observations

US Equities
What a difference a year makes. Just over one year ago, during the Christmas Eve low of 2018, investors were reconsidering their worries about the global economy. Now 2019 is in the books and the S&P 500 gained 3.0% in December, bringing the year-to-date total to 31.5%, the 18th best year for stocks since 1926. Large cap growth led value over the calendar year (+36.4% vs. +26.5%). Small cap gained 2.9% in December bringing the year-to-date total to 25.5% for 2019. Similar to large cap, small cap growth led value over the calendar year (+28.5% vs. +22.4%). Information technology (+50.3%) led all sectors for the year with the energy sector (+11.8%) posting the low.

International Equities
International equities lagged the US in 2019 but still had very solid returns. Developed international saw gains of 3.3% for the month and a year-to-date total of 22.0%. In Europe, France was the outlier for 2019 at 27.0%. Emerging markets closed out the year with a solid December gaining 7.5%, bringing the year-to-date performance to 18.4%. Within the selected BRIC emerging markets (Brazil, Russia, India and China), Russia’s market returned 52.7% for the year.

Fixed Income
The Bloomberg Barclays US Aggregate Index was slightly down in December (-0.1%), but similar to equities, the year-to-date performance was very strong at 8.7%, the 19th best year for bonds since 1926. High income households in search of tax relief drove record inflows into municipal bond mutual funds, a trend some analysts do not see slowing down in 2020.

Real Assets
MLPs (+8.5%), real estate (+0.5%) and natural resources (+6.0%) all had positive returns in December. The standout for the year was real estate (+21.9%), followed by natural resources (+17.2%) and then MLPs (+6.6%). As a result of the US airstrikes in Iran, oil prices jumped the following day. Fears of retaliation on American energy infrastructure and possible attacks on oil tankers passing through the Strait of Hormuz, where roughly a third of the world’s shipped oil passes, could spike volatility in oil prices.

This Financial Landscape represents the consensus of the Oxford Investment Fellows as of 01.03.20 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.