Weekly Market Snapshot

17 June 2019

International Equities: Things Change

... CHART OF THE WEEK:

International Equities: Things Change
Cumulative price returns: MSCI ACWI ex-U.S. and S&P 500 Index

Chart of the week

Chart courtesy of ClearBridge Investments. Source: Bloomberg, as of 5/31/19. Returns are cumulative and based on price movement only, and do not include the reinvestment of dividends. +101% for S&P 500 measures 10/09/02-10/12/2007 and +218% for MSCI ACWI ex-U.S. measures 3/12/03-10/31/07. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

The bottom line:

  • As the chart above makes clear, U.S. equities have decisively outperformed the rest of the world in recent years.
  • Yet it also shows that this hasn’t always been true. Indeed, international stocks outperformed during much of the first decade of this century.
  • This performance variation occurs in part because distinct factors drive market cycles in different directions and at different speeds.
  • Consider some of the tailwinds benefitting U.S. stocks since the 2008-2009 financial crisis.
  • The Fed reacted more quickly and with greater zeal than central banks overseas.
  • U.S. fiscal policy has been more stimulative, including recent tax cuts that helped propel the latest leg-up of U.S. stock outperformance.
  • Return on equity (ROE) in the U.S. has been generally higher than the rest of the world, lifting valuations.
  • But the very nature of market cycles is that they don’t last forever. Tailwinds, such as tax cuts, lose steam and some may even become headwinds.
  • For instance, a good part of the higher U.S. ROE is due to share buybacks, which has increased balance sheet debt for companies that have borrowed to buy back stock.
  • When the next market cycle favoring international stocks begins is anybody’s guess—the stage could already be set.
  • In the meantime, an active approach to stock selection may be the best path for investors seeking the potential diversification benefits of international equities.

The chart:

  • The chart shows cumulative price returns in percentage terms for the MSCI ACWI ex-U.S. and S&P 500 indexes from 12/31/1996 – 5/31/2019, with arrows noting the relative cumulative price performance in percentage terms during the early 2000 period.


Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as, investment advice, forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy or type of retirement account. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional.

DEFINITIONS:

The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The Morgan Stanley Capital International (MSCI) All Country World Index (ACWI) ex US captures large and mid-cap representation across 22 of 23 Developed Markets (DM) countries (excluding the US) and 24 Emerging Markets (EM) countries.

Return on Equity (ROE) is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. ROE is expressed as a percentage and calculated as: Return on Equity = Net Income/Shareholder's Equity

The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S.


Please note:

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.
Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice.
Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

Important Information
All investments involve risk, including possible loss of principal.
An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.
The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. 
Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable, but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).
This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.  Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.
This material is only for distribution in those countries and to those recipients listed.
All investors in the UK, professional clients and eligible counterparties in EU and EEA countries ex UK and Qualified Investors in Switzerland.
Issued and approved by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444. 
All Investors in Hong Kong and Singapore:
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.
This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.
All Investors in the People’s Republic of China ("PRC"):
This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC.  The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking Regulatory Commission.  Investors should read the offering document prior to any subscription.  Please seek advice from PRC’s commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only.  Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.
This material has not been reviewed by any regulatory authority in the PRC.
Distributors and existing investors in Korea and Distributors in Taiwan:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.
This material has not been reviewed by any regulatory authority in Korea or Taiwan.
All Investors in the Americas:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.
All Investors in Australia:
This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) (“Legg Mason”). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client’s professional advisers.
© 2018 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary of Legg Mason, Inc.

Weekly Market Snapshot

10 June 2019

Europe: Growing signs of a turn

... CHART OF THE WEEK:

Europe: Growing signs of a turn

Chart of the week

Chart courtesy of Brandywine Global. Source: Haver Analytics, as of 3/31/19. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • For much of the last decade, U.S. GDP growth has exceeded that of the 19 European Union (EU) member countries that use the euro, as illustrated in the chart above.
  • That’s one key reason that the U.S. dollar has been so strong relative to the euro.
  • Consider that in 28 of the last 40 quarters, U.S. GDP growth has been stronger than in the EU—over which time the euro has declined about 20% against the U.S. dollar.
  • Nearly half that drop took place in the four previous quarters alone, as growth accelerated in the U.S., but slowed in Europe.
  • So it’s no wonder that sentiment about European financial assets is more than a little skeptical.
  • Of course, sentiment is often negative just before a reversal. Could a turning point for the region be nearing?
  • The U.S. may now be slowing down as fiscal stimulus fades. The Fed has signaled (though hardly promised) that it could cut interest rates to help keep the expansion going, which might also take some steam off the dollar.
  • And despite real challenges, the risk of a significant recession in Europe still looks low—barring monetary, fiscal or banking policy mistakes in the wake of the EU elections.
The chart:

  • The chart shows, on a quarterly basis from March 2009 – March 2019, the difference in real (inflation-adjusted) year over year GDP growth between the U.S. and the 19 European Union (EU) member countries that use the euro currency.

Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as, investment advice, forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy or type of retirement account. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional.


DEFINITIONS:

TheEuropean Union (EU) is an economic and political union established in 1993 by members of the European Community. The EU now comprises 28 countries after its expansion to include numerous Central and Eastern European nations. 19 of those countries use the euro currency.

The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

Gross Domestic Product (“GDP”)is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time.


Important Information
All investments involve risk, including possible loss of principal.
U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.
Yields and dividends represent past performance and there is no guarantee they will continue to be paid.
The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. 
Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.
Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable, but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).
This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.  Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.
This material is only for distribution in those countries and to those recipients listed.
All investors in the UK, professional clients and eligible counterparties in EU and EEA countries ex UK and Qualified Investors in Switzerland.
In Europe (excluding UK & Switzerland) this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office Floor 6, Building Three, Number One, Ballsbridge, 126 Pembroke Road, Dublin 4. DO4 EP27. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.

All Investors in Hong Kong and Singapore:
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.
This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.
All Investors in the People’s Republic of China ("PRC"):
This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC.  The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking Regulatory Commission.  Investors should read the offering document prior to any subscription.  Please seek advice from PRC’s commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only.  Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.
This material has not been reviewed by any regulatory authority in the PRC.
Distributors and existing investors in Korea and Distributors in Taiwan:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.
This material has not been reviewed by any regulatory authority in Korea or Taiwan.
All Investors in the Americas:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.
All Investors in Australia:
This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) (“Legg Mason”). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client’s professional advisers.
© 2019 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary of Legg Mason, Inc.

Weekly Market Snapshot

3 June 2019

Tariffs: Pushing Prices Higher?

... CHART OF THE WEEK:

weekly chart of the week

Chart courtesy of Western Asset. Source: Bureau of Economic Analysis, as of 3/31/19. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • The U.S. recently imposed a third round of tariffs on Chinese goods, raising concerns about the impact on inflation and the bond market.
  • Western Asset’s analysis of what happened after the first round of tariffs imposed eighteen months ago provides useful clues.
  • Western examined how the 20% duty on Chinese washing machines impacted prices of major appliances. At first, prices increased rapidly and were 12% higher after twelve months.
  • But the increases were short-lived—in part due to declining demand for washing machines amid higher prices.
  • In fact, “real” (inflation-adjusted) consumption of major appliances actually decreased by 5% in the 12 months following the onset of the tariffs.1
  • What’s more, by March 2019 the index measuring prices of major appliances had experienced an outright decline.
  • While that’s just one example, it’s a great illustration of how the price impact of tariffs can be transient given other factors in the economy.
  • It’s also a reason Western Asset believes the bond market will ultimately focus more on how tariffs may influence growth and financial conditions.

The chart:

  • The chart shows, on a monthly basis from January 2003 through March 2019, the 12-month percentage change and the 3-month annualized percentage change in the Personal Consumption Expenditure (PCE) Major Appliances Price Index.

1 Source: Bureau of Economic Analysis, as of 3/31/19.


DEFINITIONS:

The Personal Consumption Expenditure (PCE) Major Appliances Price Index measures the prices of major appliances within the Personal Consumption Expenditures (PCE) Price Index. The PCE Price Index is a measure of price changes in consumer goods and services; the measure includes data pertaining to durables, non-durables and services. This index takes consumers' changing consumption due to prices into account, whereas the Consumer Price Index uses a fixed basket of goods with weightings that do not change over time.

Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as, investment advice, forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy or type of retirement account. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional.


Please note:

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice.

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

Important Information
In the U.S. - INVESTMENT PRODUCTS: NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE All investments involve risk, including possible loss of principal.
U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.
Yields and dividends represent past performance and there is no guarantee they will continue to be paid.
The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested.
Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.
Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice. Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable, but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).
This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc. Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.
This material is only for distribution in those countries and to those recipients listed.
All investors in the UK, professional clients and eligible counterparties in EU and EEA countries ex UK and Qualified Investors in Switzerland.
In Europe (excluding UK & Switzerland) this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office Floor 6, Building Three, Number One, Ballsbridge, 126 Pembroke Road, Dublin 4. DO4 EP27. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.

All Investors in Hong Kong and Singapore:
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.
This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.
All Investors in the People’s Republic of China ("PRC"):
This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC. The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking Regulatory Commission. Investors should read the offering document prior to any subscription. Please seek advice from PRC’s commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only. Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.
This material has not been reviewed by any regulatory authority in the PRC.
Distributors and existing investors in Korea and Distributors in Taiwan:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.
This material has not been reviewed by any regulatory authority in Korea or Taiwan.
All Investors in the Americas:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.
All Investors in Australia:
This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) (“Legg Mason”). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client’s professional advisers.
© 2019 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary of Legg Mason, Inc.

Weekly Market Snapshot

20 May 2019

China Trgets U.S Farmers “I hope China and the U.S. can find a better way to coexist.”

- China-based business owner and exporter Wu Shichuan

THE WEEK IN REVIEW...

China’s latest tariffs focus on U.S. agricultural exports; financial markets are pricing in at least one Fed rate cut this year; U.S. consumers’ debt load reached $13.67 trillion, with student debt outstripping auto loans. China: Tariffs target U.S. farmers

Beijing’s policy response to the tariff hike on $200 billion of imports from China was smaller, but more focused than the broader-brush U.S. move. Tariffs on $60 billion of China’s imports from the U.S. will be imposed starting June 1 on some 5,000 items, with an emphasis on agriculture – including peanuts, sugar, wheat, chicken and turkey.

In addition, Chinese buyers cancelled orders for some 3,247 metric tons of U.S. pork products, the biggest cancellation in more than a year – just as China’s domestic pork market is being ravaged by a widespread outbreak of African Swine Fever. The result is a “huge missed opportunity” for U.S. farmers, according to an economist at the American Farm Bureau Federation.

Treasury Secretary Steven Mnuchin noted that American officials “most likely will go to Beijing at some point”, but that he has “no plans yet” to make the trip. However, the G-20 summit scheduled for June 28-29 in Japan will be an opportunity for Presidents Donald Trump and Xi Jinping to meet face to face, to potentially discuss trade and other matters.

Meanwhile President Trump delayed the imposition of tariffs on vehicles imported from the European Union, despite his agreement with the Department of Commerce assessment that imports of cars and their parts represent a national security threat.

U.S. rates: Markets vs. Fed

For the second time this year, the Fed Funds futures market is priced as if the odds of a Fed rate cut taking place at the FOMC’S mid-September meeting are greater than 50%. And as in late March – the last time these odds reached this level – the U.S. yield curve has become inverted in its bellwether 3-month / 10-year segment. On the whole, the speeches by Fed officials at various events have been noncommittal rather than defiant on the issue. The next official verdict on rates will be rendered on June 19, when the FOMC issues its next statement and its latest economic forecast.

U.S. consumers: Yet more debt

American consumers added to their overall borrowing in Q1, according to the New York Fed. U.S. household debt rose 0.9% from the previous quarter to $13.67 trillion, in line with the pace of recent years. But the mix shifted somewhat, with mortgage borrowing falling to $344 billion, the lowest level since Q3 2014, even as borrowing costs fell. On the other hand, total home loan balances (the largest portion of U.S. consumer debt) rose 1.3% from the prior quarter to $9.2 trillion, the highest since 2008. Student debt rose to $1.48 trillion, while auto loans increased to $1.28 trillion, the highest level on record since this data series began in 2003.

All data Source: Bloomberg, as of May 17, 2019, unless otherwise indicated.

... CHART OF THE WEEK:

International stocks: Think small

weekly chart of the week

Chart courtesy of Royce & Associates. Source: Factset, as of 12/31/18. Analysis based on monthly rolling average annual return periods from the Index Inception (5/31/94) through 12/31/18. "International Large-Cap” (blue bar in chart) is represented by the Morgan Stanley Capital International (MSCI) All Country World Index (ACWI) ex USA Large Cap and “International Small-Cap” (green bar) by the Morgan Stanley Capital International (MSCI) All Country World Index (ACWI) ex USA Small Cap. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • International stocks clearly deserve a place in equity portfolios—but all too often, investors end up focusing only on large cap companies abroad.  History suggests that’s a serious oversight.
  • In fact, international small-caps have outperformed international large caps decisively over the last 25 years—without significantly greater volatility.
  • Consider the track records of the MSCI world large- and small-cap indices. International small caps have beaten their large cap counterparts over the past 25 years in 94% of rolling 10-year periods, 81% of rolling 5-year periods and 72% of rolling 3-year periods.1
  • Recent analysis by Royce & Associates reveals many other attractive characteristics – including their potential to enhance portfolio diversification and outperform even in negative market environments.
  • All good reasons investors should not overlook this sector—but this is not an asset class that investors can reasonably expect to tackle on their own.
  • After all, it has an investable universe twice the size of U.S. small cap, and one that’s not as widely covered by analysts.2
  • That underscores the value of an experienced active small-cap manager like Royce, with a long-established process to identify international firms that punch above their weight in terms of market share, profitability or long-term potential.

The chart:

  • The chart shows the percentages of monthly outperformance on 3-year, 5-year and 10-year basis by the MSCI ACWI ex USA Small Cap Index (green bar) versus the MWCI ACWI ex USA Large Cap Index (blue bar) since the index inception on 5/31/94 through 12/31/18.

1 Source: Factset, as of 12/31/18.
2 Source: Factset, as of 12/31/18. The MSCI ACWI ex USA Small Cap Index had 4,148 constituents compared with 2,032 in the Russell 2000. More than 30% of the companies in the MSCI ACWI ex USA Small Cap were receiving one or no sell-side analyst coverage versus 15% for those in the Russell 2000.


DEFINITIONS:

The Federal Funds rate (Fed Funds rate, fed funds target rate or intended federal funds rate) is a target interest rate that is set by the FOMC for implementing U.S. monetary policies. It is the interest rate that banks with excess reserves at a U.S. Federal Reserve district bank charge other banks that need overnight loans.

The Federal Open Market Committee (FOMC) is a policy-making body of the Federal Reserve System responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The yield curve shows the relationship between yields and maturity dates for a similar class of bonds.

Inverted yield curve refers to a market condition when yields for longer-maturity bonds have yields which are lower than shorter-maturity issues.

The Morgan Stanley Capital International (MSCI) All Country World Index (ACWI) ex USA Large Cap Index is an unmanaged, capitalization-weighted index of global large-cap stocks, excluding the United States. Index returns include net reinvested dividends and/or interest income.

The Morgan Stanley Capital International (MSCI) All Country World Index (ACWI) ex USA Small Cap Index is an unmanaged, capitalization-weighted index of global small-cap stocks, excluding the United States. Index returns include net reinvested dividends and/or interest income.

The Russell 2000 Index is an unmanaged list of common stocks that is frequently used as a general performance measure of U.S. stocks of small and/or midsize companies.


Please note:

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice.

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

Important Information
In the U.S. - INVESTMENT PRODUCTS: NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE All investments involve risk, including possible loss of principal.
U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.
Yields and dividends represent past performance and there is no guarantee they will continue to be paid.
The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. 
Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.
Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice. Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable, but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).
This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.  Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.
This material is only for distribution in those countries and to those recipients listed.
All investors in the UK, professional clients and eligible counterparties in EU and EEA countries ex UK and Qualified Investors in Switzerland.
In Europe (excluding UK & Switzerland) this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office Floor 6, Building Three, Number One, Ballsbridge, 126 Pembroke Road, Dublin 4. DO4 EP27. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.

All Investors in Hong Kong and Singapore:
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.
This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.
All Investors in the People’s Republic of China ("PRC"):
This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC.  The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking Regulatory Commission.  Investors should read the offering document prior to any subscription.  Please seek advice from PRC’s commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only.  Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.
This material has not been reviewed by any regulatory authority in the PRC.
Distributors and existing investors in Korea and Distributors in Taiwan:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.
This material has not been reviewed by any regulatory authority in Korea or Taiwan.
All Investors in the Americas:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.
All Investors in Australia:
This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) (“Legg Mason”). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client’s professional advisers.
© 2019 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary of Legg Mason, Inc.

Weekly Market Snapshot

13 May 2019

“It is hoped that the U.S. and Chinese sides will meet each other halfway and work together”

- China’s Ministry of Commerce

THE WEEK IN REVIEW...

U.S. – China: Tariff Tumult

The U.S. raised its tariffs on $200 billion worth of goods it imports from China from 10% to 25% just as China’s top-level trade negotiation team arrived in Washington for meetings that some U.S. observers had speculated might feature a signing ceremony on a wide-ranging, historic trade agreement.

There will, however, be a delay in the full impact; the White House has effectively delayed the increase by saying it only applies to goods that leave China on Friday, May 10 or afterward. Oceangoing goods already on their way to US ports would be subject to the 10% tariff policy.

Financial markets reacted mostly negatively during the week, with the S&P 500 down as much as 3.8% off its highs the previous Friday, May 3. But reaction was muted in the immediate aftermath of President Donald Trump’s announcements of a breakdown in talks late Wednesday and Thursday, May 8-9, blaming China for the impasse. Wednesday saw the S&P 500 rise just under 0.2% from Tuesday’s close, and Thursday saw it rise 0.4% from its opening price – though the index ended the day down some 0.3% from Wednesday’s close.

China’s official reaction to Thursday’s announcements and speeches was represented by an article in several outlets, including the Xinhua press agency, with the headline “If You Want to Talk, We Can Talk. If You Want to Fight, We’ll Fight”.

U.S. slow-flation: “Transitory”?

April’s core consumer prices (core CPI) rose 0.1% since March, vs. expectations of 0.2%. Including food and energy, the rise was 0.3%, also falling short of expectations. Year-on-year, core CPI rose 2.1%, in line with forecasts.

The slight shortfall challenged Fed Chair Powell’s assessment during the FOMC’s May 1 press conference that sluggish inflation was due to “transitory” factors. Financial markets appeared to agree, if briefly; the yield on the 10-year Treasury fell to as low as 2.4334 at 8:30 AM, the time of the announcement, and the market for Fed Funds futures saw a slight increase in the odds of a Fed rate cut by the end of 2019.

Emerging Markets: South Africa election

Investors in emerging markets received some welcome positive political news; the early results of South Africa’s hotly-contested national election showed the ruling African National Congress (ANC) receiving a majority of about 57% of the vote, with 90% of ballots counted. The results were seen by many as a generally favorable verdict on the sitting government’s ongoing efforts to end what is widely regarded within South Africa as rampant corruption and economic stagnation.

But the results fell short of complete vindication. Voter turnout may end up being the lowest since the end of Apartheid in 1994, and the opposition Economic Freedom Fighters (EFF) received about 10% of the vote, doubling the number of its seats in the National Assembly, and making gains in all nine provinces. The EFF platform includes controversial land reform measures. The moderate Democratic Alliance, conditionally supportive of the ANC, lost some ground.

Financial markets treated the news as broadly positive. The South African rand rose as high as 14.18 per U.S. dollar; the 10-year sovereign bond yield fell to as low as 9.05% and South African credit default swaps improved, tightening 9.35 basis points to 184.9.

... CHART OF THE WEEK:

Oil production cuts: Not for shale


Chart of the week

Source: Bloomberg, as of 4/30/19. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • The price of crude oil fell sharply in 4Q18 over concerns about slower global growth and the prospects for a recession in the U.S.
  • But oil prices have rebounded strongly this year, in part because of production cutbacks from OPEC (primarily Saudi Arabia) and Russia.
  • U.S. shale oil producers, however, continued to increase output—building on a U.S. market share of global production that reached 18% in 20181.
  • Shale producers have managed to reduce the average breakeven production price to around $50; five years ago, the breakeven price was closer to $70.
  • With shale production profitable at a lower price, its influence on the industry continues, but in ways that may not be apparent to the average investor.
  • Western Asset has indicated that the current popularity of shale may lead to tighter supply over the longer-term by causing under-investment in longer-dated supply sources.
  • And, as ClearBrdige energy analyst Dimitry Dayen notes, certain share prices are already reflecting how shale production is changing the way some companies manage their resources.

The chart:

  • The chart shows on a monthly basis from May 2015 through April 2019, shale oil production (thousands of barrels per day) from the U.S. Permian Basin and the price per barrel of West Texas Intermediate crude oil.

1 Energy Information Agency.


DEFINITIONS:

The Consumer Price Index (CPI) measures the average change in U.S. consumer prices over time in a fixed market basket of goods and services determined by the U.S. Bureau of Labor Statistics.

The Core Consumer Price Index (Core CPI) excludes the prices of food and energy, which are volatile on a monthly basis, from the basket of goods used to determine the CPI.

The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S.

The Federal Open Market Committee (FOMC) is a policy-making body of the Federal Reserve System (Fed) responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The federal funds rate (fed funds rate, fed funds target rate or intended federal funds rate) is a target interest rate that is set by the FOMC for implementing U.S. monetary policies. It is the interest rate that banks with excess reserves at a U.S. Federal Reserve district bank charge other banks that need overnight loans.

A credit default swap (CDS) is designed to transfer the credit exposure of fixed income products between parties.

The Permian Basin Shale Oil Production Index includes major U.S. shale plays: Permian Basin, Eagle Ford Shale, Marcellus Shale and Haynesville Shale.

West Texas Intermediate (WTI), also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing. This grade is described as light because of its relatively low density, and sweet because of its low sulfur content. It is the underlying commodity of Chicago Mercantile Exchange's oil futures contracts.

The Organization of the Petroleum Exporting Countries (OPEC) is a permanent intergovernmental organization of 12 oil-exporting developing nations that coordinates and unifies the petroleum policies of its member countries.


Important Information
All investments involve risk, including possible loss of principal.
U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.
Yields and dividends represent past performance and there is no guarantee they will continue to be paid.
The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. 
Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.
Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable, but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).
This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.  Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.
This material is only for distribution in those countries and to those recipients listed.
All investors in the UK, professional clients and eligible counterparties in EU and EEA countries ex UK and Qualified Investors in Switzerland.
In Europe (excluding UK & Switzerland) this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office Floor 6, Building Three, Number One, Ballsbridge, 126 Pembroke Road, Dublin 4. DO4 EP27. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.

All Investors in Hong Kong and Singapore:
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.
This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.
All Investors in the People’s Republic of China ("PRC"):
This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC.  The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking Regulatory Commission.  Investors should read the offering document prior to any subscription.  Please seek advice from PRC’s commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only.  Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.
This material has not been reviewed by any regulatory authority in the PRC.
Distributors and existing investors in Korea and Distributors in Taiwan:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.
This material has not been reviewed by any regulatory authority in Korea or Taiwan.
All Investors in the Americas:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.
All Investors in Australia:
This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) (“Legg Mason”). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client’s professional advisers.
© 2019 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary of Legg Mason, Inc.

Weekly Market Snapshot

6 May 2019

“There’s good reason to think that these low [inflation] readings are particularly influenced by some transitory factors”

- Powell said

... The week in review:

U.S. Jobs: Payday

Friday's Jobs report for April handily beat expectations. Nonfarm payrolls grew by 263,000 and the unemployment rate fell to 3.6%, adding to the week's string of strong economic figures, which included the ADP employment report for April, the 3.6% non-farm productivity figure and the decline in unit labor costs for Q1. The week's figures were also broadly in line with the better-than-expected 3.2% GDP for Q1, reported the week before.

Financial market reaction was mild, with yields1 for the 2-year and 10-year Treasury virtually unchanged at 2.339% and 2.539% respectively. The U.S. dollar rose slightly against a basket of other currencies, with the Dollar Index continuing its upward move since the May 1 FOMC decision, rising just under 1% since the beginning of the post-meeting press conference.

The Fed: "transitory factors"

The stubbornly low 1.6% core PCE inflation figure for March and associated statements of concern from Fed governors could be seen as signals the FOMC might be inclined to cut, rather than raise, its target rate for Fed Funds.

But Fed Chair Jerome Powell's statement and press conference on Wednesday took a different tack, surprising more than a few observers and market participants. Instead of following through on previous hints about the need to boost inflation by possibly lowering rates, Mr. Powell characterized the forces keeping inflation low as "transitory", not requiring any change in policy direction by the FOMC.

Financial market reaction reflected the slight change in direction, with the futures market for Fed Funds showing the probability of a rate cut at the June 19th meeting falling back to less than 10% from its end-of-March figure of nearly 33%.

China commodities: Hog-tied

China is home to over 440 million swine, half the world's population -- so the rapid spread of "African swine fever" from farms in Shenyang is cause for concern in commodities markets worldwide. Chinese officials estimate that 1 million hogs have already been culled to control the spread of the disease, which appears not to be contagious for humans. But that is a small fraction of the estimates of what will ultimately be required, which could include nearly 25% of China's existing stock. The U.S. Department of Agriculture's April forecast expects a decline in China's herd of about 134 million, equivalent to the entire annual U.S. output of pigs.

Chinese official data show a slowdown in the number of pigs affected since late 2018, supporting the government’s assessment that the disease is “under effective control.” Even so, the impact will clearly ripple through the world's trade in hog-related commodities, as well as beef-related commodities such as feedstocks in ways not yet entirely clear.

All prices Source: Bloomberg, as of May 3, 2019, unless specified otherwise.

... CHART OF THE WEEK:

U.S. stocks: New highs, more worries
Global Economic Policy Uncertainty Index

Chart of the week

Chart courtesy of QS Investors. Source: Bloomberg, from March 31, 2009 through March 31, 2019. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

The bottom line:

  • The Global Economic Policy Uncertainty Index1 measures sentiment about economic policies in 16 countries that account for two-thirds of global output—based on the content of local news articles.
  • The uncertainty reflected in that index is notably high - with an unresolved Brexit and a still-contentious global trade environment at the top of contributing factors.
  • Yet that hasn’t slowed down stocks this year. The MSCI World Index, excluding the U.S. is up 13.87% year to date.2 And the gains are even stronger in U.S. stocks, with major indexes like the S&P 500 and NASDAQ touching new all-time highs.3
  • For the moment, the Fed‘s dovish turn on rates and recent positive economic data in the U.S. have helped support prices.
  • But while stocks could continue to move higher, it’s nevertheless worth considering the potential for volatility implicit in the combination of high prices and geopolitical uncertainty.
  • Of course, investors concerned with that possibility have choices beyond moving out of stocks.
  • As QS Investors points out in a recent article, one alternative is simply rebalancing current equity allocations with a focus on embedded cyclicality, beta and valuation, which may help “lower overall volatility and dampen drawdowns amid bouts of volatility.”

The chart:

  • The chart shows the monthly level of the Global Economic Policy Uncertainty Index with current price GDP weights from March 31, 2009 – March 31, 2019 and the corresponding average for that 10-year period.

1The Global Economic Policy Uncertainty (GEPU) Index is a GDP-weighted average of national EPU indices for 16 countries that account for two-thirds of global output. Each national EPU index reflects the relative frequency of own-country newspaper articles that contain a trio of terms pertaining to the economy, uncertainty and policy-related matters.

2 Source: Bloomberg, as of 4/30/19.

3 Source: Bloomberg. As of 4/30/19, the year-to-date total returns of the S&P 500 and the Nasdaq Composite were 18.25% and 22.39% respectively. On 4/30/19, the S&P 500 set a record high of 2,945.83 and on 4/29/19 the Nasdaq Composite set a record high of 8161.85.


DEFINITIONS:

The ADP National Employment Report provides a monthly snapshot of U.S. nonfarm private sector employment based on actual transactional payroll data.

ADP is a comprehensive global provider of cloud-based Human Capital Management (HCM) solutions that unite HR, payroll, talent, time, tax and benefits administration, and a leader in business outsourcing services, analytics and compliance expertise. The ADP Research Institute works in close collaboration with Moody's Analytics and its experienced team of labor market researchers to publish monthly employment reports.

The Federal Open Market Committee (FOMC) is a policy-making body of the Federal Reserve System (Fed) responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The Personal Consumption Expenditures (PCE) Price Index is a measure of price changes in consumer goods and services; the measure includes data pertaining to durables, non-durables and services. This index takes consumers' changing consumption due to prices into account, whereas the Consumer Price Index uses a fixed basket of goods with weightings that do not change over time. Core PCE excludes food & energy prices.

The federal funds rate (fed funds rate, fed funds target rate or intended federal funds rate) is a target interest rate that is set by the FOMC for implementing U.S. monetary policies. It is the interest rate that banks with excess reserves at a U.S. Federal Reserve district bank charge other banks that need overnight loans.

"Brexit" is a shorthand term referring to the UK vote to exit the European Union

The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

Gross Domestic Product (“GDP”)is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time.

The MSCI World Index is an unmanaged index of common stocks of companies representative of the market structure of 22 developed market countries in North America, Europe, and the Asia/Pacific Region.

The NASDAQ Composite Index is a market-capitalization-weighted index that is designed to represent the performance of NASDAQ securities and includes over 3,000 stocks.

The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S.


Please note:

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.
Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice.
Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

Important Information
All investments involve risk, including possible loss of principal.
An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.
The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested.
Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice. Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable, but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).
This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc. Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.
This material is only for distribution in those countries and to those recipients listed.
All investors in the UK, professional clients and eligible counterparties in EU and EEA countries ex UK and Qualified Investors in Switzerland.
Issued and approved by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444.
All Investors in Hong Kong and Singapore:
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.
This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.
All Investors in the People’s Republic of China ("PRC"):
This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC. The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking Regulatory Commission. Investors should read the offering document prior to any subscription. Please seek advice from PRC’s commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only. Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.
This material has not been reviewed by any regulatory authority in the PRC.
Distributors and existing investors in Korea and Distributors in Taiwan:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.
This material has not been reviewed by any regulatory authority in Korea or Taiwan.
All Investors in the Americas:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.
All Investors in Australia:
This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) (“Legg Mason”). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client’s professional advisers.
© 2018 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary of Legg Mason, Inc.

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