Weekly Market Snapshot

18 February 2019

"China and the U.S. are inseparable. They both do well or they both get hurt. Cooperation is the best choice"

- China's President Xi Jinping

THE WEEK IN REVIEW...

U.S. Consumer: No sale

Retail sales figures for December, delayed due to the partial U.S. government shutdown, weren't worth the wait for those seeking good news. Sales at stores, restaurants and online fell a combined 1.2% from November, the biggest monthly drop since September 2009.

Matthew Shay, head of the National Retail Federation said anxiety about trade and financial markets appeared to affect consumers "more than we expected”. Of particular note: online sales fell -3.9% since November, the biggest monthly decline since November 2008, and were up only 3.7% from December 2017, sparking skepticism about the figures' accuracy. Either way, Fed Governor and voting member of the rate-setting FOMC Lael Brainerd noted that the report "certainly caught my eye".

The questions about accuracy also blunted the impact of disappointing factory production figures, which shrank -0.6% in January from a downwardly-revised 0.1% gain in November.

China: Trade talks wrap for now

China and the U.S. moved toward finding common ground in the meetings that ended Friday. China's Xinhua news agency reported the teams "reached consensus in principle on major issues", while China's President Xi stated the meetings "achieved important progress".

The official statement from the U.S. at the end of the week's session stated: "both sides will continue working on all outstanding issues" in advance of a U.S. self-imposed deadline of March 1, after which 10% U.S. tariffs on some Chinese goods are scheduled to rise to 25%.

U.S. trade representative Robert Lighthizer said, "We have additional work to do but we are hopeful". Another round of talks is expected to take place shortly in the U.S.

Mexico: Pemex gets help

The state-owned oil company, suffering from decades of underinvestment, is scheduled to get some long-awaited help to get back on its feet. Tax relief over and above the cuts already promised by incoming president Andrés Manuel López Obrador ("AMLO") bring the tax savings to 15 billion Mexican pesos (about $770 million) this year and 30 billion pesos in 2020. The deductions add to the 25 billion peso ($1.3 billion) capital injection already included in Mexico's 2019 budget, as well as other measures. In exchange, Pemex has assured the government it will not issue any fresh debt this year beyond its need to refinance current debt outstanding.M

U.K: Bracing for Brexit

Retail sales in the U.K. rose the fastest in six months, as heavy discounts on clothing drew consumers to shops. Some observers suggested the discounts were motivated by the need to make money from existing inventory while consumers were still motivated to buy ahead of the impending unknown state of affairs after the March 29 Brexit deadline, deal or no. Overall, excluding auto fuel, the volume of goods sold and online rose 1.2% from December.

The housing sector saw no such spike in volume, despite the headline price index falling for a fourth consecutive month in January as measures of new enquiries, sales and listings declined. "Resolution of the Brexit negotiations is widely seen as critical to encouraging potential buyers back into the market", according to industry source Royal Institute of Chartered Surveyors.

All data: Source Bloomberg, as of February 15, 2019, unless otherwise specified.

... CHART OF THE WEEK:

Real Estate: The Warehouse Opportunity


Chart of the week

Chart courtesy of Clarion Partners. Source: CBRE-EA, Clarion Partners Investment Research, Q3 2018.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:

  • Booming demand for warehouse properties is one of the unanticipated side effects of the rapid growth in on-line shopping – fueled by the general pickup in consumer spending over the decades, to the point that the consumer sector of the U.S. economy is estimated by some to comprise over 60% of the economy’s total size.
  • With e-commerce now accounting for 12% of total core retail sales, and forecast to grow to over 30% by 2030, the increase in demand seems unlikely to abate soon.
  • According to Clarion Partners, the main issue is the availability of warehouse properties suitable for today’s needs U.S. warehouse stock has increased by about 75% over the past three decades. But the size of the average warehouse footprint has reached about 185,000 square feet (sf) – not large enough to meet the needs of the largest “bulk” warehouse clients, where the category size begins at 400,000 sf.
  • And with nearly 50% of existing warehouse properties built before 1980, and 80% of the total number of warehouse properties being smaller than 400,000 sf, there is tremendous potential for growth to accelerate, given buyer demand for space with modernized characteristics, including energy efficiency and reliable power – as well as sufficient space to conduct business at a scale needed for the economy’s current business needs.
  • These trends are behind both steady growth in rents, and a rapidly falling vacancy rate, which stood at 4.3% at the end of Q3 2018, the most recent figure available.
  • It’s clear that this segment of the economy could be positioned for growth. For investors looking to participate in this sector at a scale appropriate for individuals, it can help to have the benefit of the expertise, experience and in-depth research of a specialized firm like Clarion Partners.

The chart:

  • The chart shows, for 2014 to Q3 2018, the vacancy rate and effective rent for the total U.S. industrial warehouse industry.

Note: Industry data provided by Clarion Partners.

This does not constitute investment advice. All information has been developed by Clarion Partners or obtained from sources that Clarion Partners believes to be reliable. This material is not an offer to sell or a solicitation of an offer to buy any security.

Investment in real estate entails significant risks and is suitable only for certain investors as part of an overall diversified investment strategy and only for investors able to withstand a total loss of investment.

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 Open Market Committee (FOMC) is a policy-making body of the Federal Reserve System (Fed) which is 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.

Petróleos Mexicanos, or Pemex, is Mexico's state-owned petroleum company, created in 1938 via the nationalization and expropriation of all private, foreign, and domestic oil companies at that time.


Important Information
All investments involve risk, including possible loss of principal.
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.
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.
© 2019 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary of Legg Mason, Inc.

Weekly Market Snapshot

11 February 2019

“We can no longer secretly assume that by the end of the year we will have raised more taxes than we planned to”

- German Finance Minister Olaf Scholz

... The week in review:

Brexit: Dublin Down

Despite the chilly reception she received in Brussels, UK Prime Minister May continued to press her case in Dublin, seeking a way to square the circle on avoiding the need to physically secure the Irish/UK border. With the result of May’s whirlwind negotiations unclear, many stakeholders are making contingency plans for a no-deal Brexit on March 29. One example is the Trans-European transport network (TEN-T), which comprises ports and shipping lines using the North Sea routes for direct shipments between Dublin and the rest of the EU. The affected ports have successfully negotiated new terms on their own, which are now awaiting final approval by EU ministers and the European Parliament.

Meanwhile, U.S. Ambassador to the EU Gordon Sondland added to trade concerns by reminding interviewers in Brussels that “…the good faith and understanding that existed [at the time of a joint U.S. – EU trade meeting in July] has not been followed through on”.

Eurozone growth: Lowered expectations

The European Union lowered its 2019 forecast for full-year economic growth in the 19-nation group using the euro as its common currency. For 2019, it projected growth of 1.3% (vs. 1.9% in November); and for 2020, 1.6% vs 1.7% in November. That’s a substantial comedown from the 2.4% growth seen in the eurozone in 2017.

The drop in the official forecast comes after Italy fell into recession at the end of 2018, and after the World Bank lowered its own forecast for global growth. The speed of the slowdown may be one factor feeding tensions between eurozone members Italy and France, which have gotten serious enough for France to recall its ambassador from Rome amid a volley of colorful insults. The cause, over and above barbed commentary from Italy’s populist government: Italy’s deputy prime minister Luigi Di Maio met Tuesday with a leader of the anti-Macron “Yellow Vest” protestors.

Russia: Nyet to the flock of doves

Russia’s central bank decided against lowering its key interest rate from 11%, citing the uncertainty in global crude-oil prices. The decision was the fifth in a row to keep rates on hold, in a stated attempt to steer inflation expectations downward, despite calls for lower rates by business groups

All data Source: Bloomberg, as of February 7, 2019, unless otherwise indicated.

... CHART OF THE WEEK:

Inflation: One Way or Another

Chart of the week

Source: Bloomberg, Feb 7, 2019. * Note: Projected inflation rates are based on the yields of 5-year U.S. Treasuries and 5-year U.S. Treasury Inflation-protected Securities (U.S. TIPS) Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

The bottom line:

  • For better or worse, inflation expectations are on the rise, according to one segment of the bond market closely watched by investors worldwide.
  • That segment was created in 1997 with the issuance of U.S. Treasury Inflation Protected Securities, or “TIPS”, whose principal increases or decreases based on the Consumer Price Index (CPI)
  • Comparing the yields of 5-year TIPS to 5-year U.S. Treasuries –both of which reflect market expectations of yields five years into the future allows the calculation of a “breakeven inflation rate”, the rate of inflation at which the yield of TIPS is equivalent to the yield of Treasuries that don’t explicitly adjust for inflation.
  • For much of 2018, the breakeven rate suggested inflation would meet or beat the Fed’s inflation target of 2% over the coming five years. But that began to change in Q4, as skepticism rose about the U.S. economy’s ability to continue record-setting growth rate in the face of the Fed’s projected rate hike schedule.
  • Inflation expectations continued to sink after the Fed’s December 19th reaffirmation of its plans, only to reverse themselves yet again at the very end of the year as interviews and speeches by members of the FOMC dropped clear hints that change was in the wind.
  • By the time the FOMC met at the end of January, breakeven rates had resumed their upward path; the Fed’s dovish tilt at its January 30th meeting seemed to ratify the market’s verdict about what it would take to maintain the economy’s progress.

Inflation vs. recession? See why ClearBridge Investors is concerned about wage growth

The chart:

  • The chart shows, between January 2, 2018 and February 7, 2019, market-based inflation expectations, represented by the U.S. 5 year-5 year forward inflation breakeven rate, and the dates of the two most recent FOMC decisions, December 19, 2018 and January 30, 2019.

Note: All prices Source: Bloomberg, as of Feb 7, 2019, unless otherwise specified.


DEFINITIONS:

U.S. Treasury inflation protected securities (TIPS) are a special type of Treasury note or bond that offers protection from inflation. Like other Treasuries, an inflation-indexed security pays interest six months and pays the principal when the security matures. The difference is that the coupon payments and underlying principal are automatically increased to compensate for inflation as measured by the CPI. Also referred to as “Treasury inflation-indexed securities.”

TheConsumer 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 5-year, 5-year forward breakeven inflation rate is a measure of expected inflation derived from "nominal" Treasury securities and their "real" counterparts—inflation-protected TIPS securities.

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.


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.

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.

U.S. Treasury Inflation Protected Securities (“TIPS”) are bonds that receive a fixed, stated rate of return, but they also increase their principal by the changes in the CPI-U (the non-seasonally adjusted U.S. city average of the all-item consumer price index for all urban consumers, published by the Bureau of Labor Statistics). TIPS, like most fixed income instruments with long maturities, are subject to price risk.
Less 

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 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

4 February 2018

“When we see a sustained change in financial conditions, that's something that has to play into our thinking.”

- Fed Chair Jerome Powell

... The week in review:

Rates: Welcome to the Powell Put

To the relief of financial markets, the Fed took pains to retreat from its hawkish position late last year. The FOMC’s Jan 30 statement and post-meeting remarks departed from December’s stance, with no mention of gradual rate hikes, the addition of the word “patient” in describing its approach, and more. Dodging a question on whether the Fed’s latest no-hike rate decision was an end to the tightening regime, Powell noted “We’re going to know in hindsight”.

The reaction in fixed-income markets was immediate. Yields on 10-year Treasuries dropped nearly 11 basis points (bps) to as low as 2.622% on January 31, the day following the Fed decision. The 2-year fell nearly 13 bps to as low as 2.455%, and the 30-year, fell less (6.8 bps to as low as 2.536%) reflecting the longer-term outlook. Yield curve steepness ( the spread between 3-month and 10-year Treasuries), moved away slightly from its flattish recessionary level, falling 9.1 bps to as low as 27.1 bps.

For more on the state of the economy, explore the latest from ClearBridge on Anatomy of a Recession

U.S. jobs: Still solid

The numbers were solid all around, with the impact of the January partial federal government shutdown largely absent due to survey methodology. The unemployment rate came in at 4.0%, slightly above expectations; private payrolls rose 296k, better than expected. However, December’s figure saw a downward revision of 90k. Labor participation rose slightly due to an increase in job seekers, some of whom might have been furloughed Federal workers; that’s also one explanation for the sharp rise in the underemployment rate, to 8.1% from December’s 7.6%; there was an atypically high 500k workers joining the category. One bright note: prime working age 25-54 employment rate came in at 82.6%, highest since 2010. One downbeat note: wages disappointed, slowing to a 0.1% gain, below expectations.

OPEC: Showing discipline

January was the kickoff of OPEC’s new production agreement; figures suggest an 80% compliance rate. Output fell by some 930k barrels (bbl) per day to 31.02 million bbl/day. Of the 11 members committing to the agreement, excluding Iran, Libya and Venezuela, compliance with the agreed-to production levels was some 79%, according to Bloomberg. with Saudi Arabia cutting 450mm bbl/day, one third more than required, to 10.2 million. That’s a big number; Saudi Arabia produced 11.1 million bbl/day in November.

Italy: It’s official

Italy’s economy shrank by 0.2% in Q4 2018, its second consecutive fall, and now meets the standard definition of an economic recession. That’s not a surprise, given the overall slowdown in Europe’s growth as global trade has weakened. Overall Eurozone growth picked up slightly in Q4, but Germany’s Q3 contraction has rippled through Europe’s economy, due to its high exposure to manufacturing and exports. Germany’s figures for Q4 were not available as of Friday, Feb 1.

All data Source: Bloomberg, as of January 25, 2019, unless otherwise indicated.

... CHART OF THE WEEK:

Stocks: Don't Fear the Flattener

Chart of the week

Chart Courtesy of ClearBridge Investments. Data from 1962 to Dec. 31, 2018. Source: ClearBridge Investments, Federal Reserve, S&P, Bloomberg, FactSet. * Note: Please see details in the Disclosures section of this document. 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:

  • An inverted yield curve – where near-term yields are higher than longer-term yields – is widely accepted as a harbinger of recession 6- to 18 months later.
  • But history suggests it could be a mistake to move away from stocks when the curve shows signs of flattening.
  • ClearBridge Investments Investment Strategist Jeff Schulze notes that since 1962, the S&P 500 has delivered meaningfully positive annualized returns both 12 months and 24 months following periods where the yield curve slopes up, but only by a small amount.1
  • Even when the yield curve has actually inverted (represented by the pair of bars at the far left), net returns were still greater than zero.
  • For now,2 yield curve steepness is a little over 31 basis points, up from about 15 bps on January 3.
  • If history is a guide, prospects for positive equity returns could be better than many anticipate.

More from ClearBridge about the prospects for recession

The chart:

  • The chart shows, between 1962 and December 31, 2018, the annualized returns of the S&P 500 Index, for the 12 and 24 months following five levels of steepness of the U.S. Treasury yield curve.

1 Specifically, when there is 0 to 50 basis points' difference between the 3-month U.S. Treasury T-Bill and the 10-year Treasury note.

2 January 31, 2019, 10:00 AM ET

All data Source: Bloomberg, January 31, 2019, unless otherwise indicated.


DEFINITIONS:

A basis point is one one-hundredth (1/100, or 0.01) of one percent.

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 is the graphical depiction of the relationship between the yield on bonds of the same credit quality but different maturities.

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:

* Note to the chart: Data from 1962 to Dec. 31, 2018. Source: Federal Reserve, S&P, Bloomberg, and FactSet. Note: Forward 12 and 24-month annualized returns for S&P 500 based on level of 3-Month vs. 10-Year yield curve and change in 3-Month vs. 10-Year yield curve over prior 3 months during periods where the yield curve flattened over the prior 3 months.

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

28 January 2019

“[Spain has] lost a decade, We have the obligation to win the one ahead.”

- Spain’s new Prime Minister Pedro Sánchez

... The week in review:

U.S. – China trade talks: Next round

Hopes for a thaw in the prolonged U.S.-China trade stalemate rose in early January, when Vice Premier Liu He unexpectedly attended a trade negotiation session in Beijing. Mr. Liu is China’s highest-ranking official to attend this series of meetings, suggesting tariff and trade issues are now meriting greater attention.

Vice Premier Liu is scheduled to make another appearance in trade negotiation meetings later this week, as leader of his country’s delegation to Washington. The current willingness of the U.S. to engage in a high-profile session s led to speculation that some form of agreement is in the offing.

Europe: Creeping funk

Sentiment on the part of corporations in Germany fell for the fifth time in a row in December, according to the highly-regarded Ifo Institute. The main issues surfaced in the Ifo survey were uncertainties in trade and increased concern about China’s economy. “Disquiet is growing among German businesses,” said Ifo President Clemens Fuest.

The concerns were consistent with recent economic results. Germany’s economy contracted 0.2% in Q3, though this was mainly about newly restrictive auto emissions standards. Results for Q4 should be released this week; Germany’s central bank published its expectation that the “German economy should have grown again in the final quarter of 2018, albeit only at a muted pace.”

More broadly, European Central Bank (ECB) President Mario Draghi sounded downbeat during this most recent ECB monthly press conference. The sentiment was echoed by ECB Executive Board member Benoit Coeure, who said the persistent weakness in Europe “has surprised us” and may have changed the ECB’s plans to raise rates later this year -- but, in his words, “it’s too early to have that discussion because we’re still understanding the nature of the shock.”

Venezuela: Sticking with the plan

The continued willingness of the military to support Venezuela’s Nicolás Maduro amid the country’s economic collapse has attracted renewed attention after National Assembly President Juan Guaido declared himself as interim head of state, gaining the explicit support of the United States.

Other countries, including Russia and China, had the opposite reaction. That’s not a complete surprise, since the two powers have been supporting Venezuela’s dominant public-sector economy by extending billions of dollars of credit, via purchasing Venezuela’s bonds. That credit extension helps the two countries maintain and extend their influence in Central and South America, and helps ensure the support of certain public-sector groups – especially the military – who, as a result, are relatively insulated from the economic disasters befalling the rest of the economy.

All data Source: Bloomberg, as of January 25, 2019, unless otherwise indicated.

... CHART OF THE WEEK:

EM Stocks: Beyond the Jitters
Attractive Valuations Relative to Global Stocks

Chart of the week

Chart Courtesy of Martin Currie. Source: Bloomberg, as of Dec 31, 2018. 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:

  • Investors in Emerging Markets (EM) stocks could be forgiven for being gun-shy after a rough 2018, with EM index returns ending the year down -16.6%. 1
  • In that context, the 7.2% updraft between Dec. 26 and Jan. 21 might feel less than entirely satisfying.
  • But the flip side of that modest gain is that there are still good reasons to revisit the sector -- starting with valuations.
  • Most notably, the price-to-book ratio – a valuation measure that’s less susceptible to earnings manipulation than the standard P/E ratio, and frequently used to evaluate international stocks – stood at 1.46, vs. 2.12 for the world’s equity markets, as shown above. 2
  • That’s a big difference, given that both sectors are currently delivering a very similar return on equity, at 13.8% and 13.1%, respectively.
  • That backdrop suggests there’s opportunity for long-term EM investors like Legg Mason’s Martin Currie to purchase stocks at attractive prices in companies in these markets – on a selective basis, in keeping with their active approach.
  • For more insight into Emerging Markets now, read Martin Currie’s 2019 outlook –Current Volatility, Long-term Opportunity.
The chart:

  • The chart shows the Price-to-Book ratios of the MSCI Emerging Markets Index and the MSCI World Index for the ten years 31 December 2008 to 31 December 2018.

1 Source: Bloomberg. MSCI Emerging Markets Index, Jan 1 – Dec 31 2018.

2 Note that Martin Currie’s figures are as of 12/31/18; the figures in their 2019 Outlook are as of 10/31/18.

All data Source: Bloomberg and Martin Currie, unless otherwise noted.


DEFINITIONS:

The Ifo Institute for Economic Research is one of Germany's largest economic think-tanks Ifo is an acronym from Information and Forschung (research). Ifo is widely known for its monthly Ifo Business Climate Index.

Emerging markets (EM) are nations with social or business activity in the process of rapid growth and industrialization. These nations are sometimes also referred to as developing or less developed countries.

The price-to-book (P/B) ratio is a stock's price divided by the stock’s per share book value.

The price-to-earnings (P/E) ratio is a stock's (or index’s) price divided by its earnings per share (or index earnings).

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 MSCI Emerging Markets (EM) Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.

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.


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.

An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

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 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

21 January 2019

“Tailwinds have lost their gust, interest rates are closer to normal levels, and inflation is tame. The approach we need is one of prudence, patience, and good judgment."

- New York Fed President John Williams

THE WEEK IN REVIEW...

Brexit: To fight another day

With UK Prime Minister May’s Brexit plan rejected in Parliament by an historic margin, the question remains:  what plan could win sufficient support to pass, and how will the UK get there?

May’s challenge was made only slightly easier after her government survived yet another no-confidence vote after the Brexit proposal’s defeat. That leaves the door open to a possible “Plan B” proposal; another round of discussions with a change-resistant European Union; an extension of the March 29 deadline for Brexit to take effect; or the long-dreaded “hard” Brexit, in which the UK leaves the EU without prior arrangements.

For more insight into the choices and consequences ahead, read Western Asset’s Brexit: Deal or No Deal? Or Something in Between?

China: Break in the clouds?

Thursday January 17th saw a report surface in the press, quickly denied by U.S. officials, that Treasury Secretary Steven Mnuchin was considering offering China a temporary rollback on tariffs in order to calm financial markets. The report, carried initially by the Wall Street Journal, comes against the backdrop of rumored differences of opinion between Secretary Mnuchin and U.S. Trade Representative Robert Lighthizer, known as a hard-liner on tariffs and trade.

Equity markets in Asia surged on the news and pulled back only slightly after the official denial; Hong Kong’s Hang Seng Index rose as much as 1.4% intraday before finishing up 1.25% to 27,090.81 on Friday1 ; the Shanghai-Shenzhen CSI 300 Index closed up by 1.82% to 3168.17; Japan’s Nikkei 225 rose 1,29% to 20,666.07.

Positive news on China’s trade and growth would be timely for the entire East Asia region. Singapore’s exports saw the biggest monthly decline in more than two years in December as U.S. China tensions, combined with a slowing U.S. tech sector, took a toll. Indonesia’s central bank held its benchmark rate at 6% in its most recent announcement, in the expectation that China would respond to its own slowdown by easing its stance toward leverage; the People’s Bank of China’s recent decision to decrease its required deposit reserve ratio by 0.5 percentage points to 13.50%, effective January 25 and inject 570 billion yuan ($84 bn) on January 15 into the interbank market are recent examples of China’s proactive approach to supporting growth.

1 Please note that due to time zone differences, the trading days Friday in East Asia end at approximately 1:30 AM (Japan), 3:15 AM (Hong Kong) and 2:05 AM (Shanghai/Shenzhen Index) on Friday, Eastern U.S. time. Source: Bloomberg

All data Source: Bloomberg, as of January 18, 2019, unless otherwise indicated.

... CHART OF THE WEEK:

Volatility Picks Up Following a Flattening Yield Curve

weekly chart of the week

Chart Courtesy of ClearBridge Investments. Source: Bloomberg. 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:

  • Concerns about rates and earnings have played a significant part in the two major downdrafts in U.S. stocks that rattled investors last year.
  • But in 2019, stock volatility will likely be less driven by sentiment, than by the shrinking availability of liquidity to businesses and consumers.
  • Higher rates and the Fed’s program of quantitative tightening are obvious reasons, since they both make borrowing less attractive.  But the recent rise of the U.S. dollar, and widening of credit spreads2 also have an impact.
  • Indeed, ClearBridge Investments annual outlook notes a pattern of delayed impact between the fall of liquidity and the rise of volatility in the S&P 500.
  • Consider that liquidity can be measured by the term premium for bonds, i.e. the incremental yield the market demands for the additional time waiting to get repaid. One convenient measure of this is the flatness of the U.S. Treasury yield curve between 2 and 10 years.
  • ClearBridge’s chart suggests that as the 2- to 10-year spread falls, especially as it goes negative, volatility follows in lagged fashion – signaling the prospect of greater volatility in roughly 18 to 30 months.
  • As a result, it’s reasonable to expect that future gains in equity markets would be driven by earnings, political developments and valuations.

The chart:

  • The chart shows, between January 1991 and the end of September 2018, the monthly average for the CBOE S&P500 Volatility Index (VIX), lagged by 30 months, and the 2-year vs. 10-year yield spread of U.S. Treasuries (inverted for comparison purposes).

2 Define “credit spreads”

All data Source: Bloomberg and ClearBridge Investments, unless otherwise noted.


DEFINITIONS:

The NIKKEI 225 is a price-weighted index composed of Japan’s top 225 blue-chip companies on the Tokyo Stock Exchange.

The Hang Seng Index is a market capitalization-weighted index of 40 of the largest companies that trade on the Hong Kong Exchange.

The Shanghai Shenzhen 300 Index is a cap-weighted index that tracks the daily price performance of the 300 most representative class A share stocks listed on the Shanghai or Shenzhen Stock Exchanges.

A credit spread is the difference in yield between two different types of fixed income securities with similar maturities, where the spread is due to a difference in creditworthiness.

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.

Spread is the difference in yield between two different types of fixed income securities with similar maturities; usually between a Treasury or sovereign security and a non-Treasury or non-sovereign security.

Liquidity refers to the degree to which an asset or security can be bought or sold in the market without affecting the asset's price.

The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a measure of market expectations of near-term volatility as conveyed by S&P 500 stock index option prices.


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.

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.

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.

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.

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.

An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

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

14 January 2019

“With the muted inflation readings we've seen coming in, we will be patient as we watch to see how the economy evolves”

- Fed Chair Jerome Powell

THE WEEK IN REVIEW...

The Fed: Reverse Jawbone After an onslaught of objections from financial markets and the Executive Branch to the projected path of rate hikes announced in December, voting members of the Fed’s Open Markets Committee unleashed their own high-profile publicity campaign, culminating in live interviews of Boston Fed president Eric Rosengren and Fed Chair Powell on Thursday, January 10.

The overall message was that the Fed is far from oblivious about the possibility of a slowdown, despite the impression left by its previous speeches and forecasts. In particular, there was emphasis that its “data-dependent” forecasts and actions will take that possibility into account while making rate decisions over the coming months.

Financial markets seem to have embraced the more conciliatory messaging. Since the campaign began on January 4, which saw the S&P 500 move up by as much as 3.8% during the day in response to [what happened on Jan 4 TBD]. the index has risen about 6.3% by the end of January 10. That’s brought the S&P 500 up 3.5% for the year to date.

Going forward, the Fed will have additional opportunities to speak more formally about its views than in previous years, having promised to hold press conferences after each of its eight meetings as opposed to once per quarter. Whether that will add or detract from its current perceptions of its level of clarity is yet to be seen.

China: Incentives A close reading of the statement issued at the end of the three-day negotiating session on U.S.-China trade reveals that both sides now see clear benefits to making a deal, and appear to believe that an agreement could be possible within the foreseeable future -- a solid improvement in the tone of negotiations.

Further evidence comes from the January 11th announcement by U.S. Treasury secretary Mnuchin that Vice Premier Liu He, China’s top economic official, is expected to travel to Washington in the coming weeks for a new round of trade talks. That’s after Mr. Liu made a surprise appearance at the negotiation sessions in China, suggesting that the government views the possible next round as worth the trip.

Separately, factory-gate inflation (China’s equivalent measure of producer price inflation) rose 0.9% year on year, a two-year low, while consumer prices rose 1.9%, lowest in 6 months. These figures are consistent with the People’s Bank of China latest reduction in banks’ required reserve ratio, intended to free up funds for lending and investment.

Brexit: Brinkmanship Tuesday will see a much-anticipated vote in the House of Commons on the Agreement currently scheduled to come into force at the end of March. To sharpen the matter, an amendment was added, 308-297, to the Brexit motion currently up for a vote on Tuesday would force Prime Minister May to propose a “Plan B”, within three days if her current proposed plan fails to pass. It might be a sign of desperation that Friday January 11 saw a single-source story about a possible delay in the implementation of the Brexit agreement generated a brief 1.1% upward move in the British pound vs. the U.S. dollar, as well as a 52-point surge in the FTSE 100 Index before both retreated in the face of denials.

All data Source: Bloomberg, as of December 21, 2018, unless otherwise indicated.

Definitions:

The FTSE 100 Index comprises the 100 most highly capitalized blue-chip companies, representing approximately 81% of the U.K. market. It is used extensively as a basis for investment products, such as derivatives and exchange-traded funds.

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 Personal Consumption Expenditures (PCE) Price Index and the PCE Deflator are measures of price changes in consumer goods and services; the measures include 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.

... CHART OF THE WEEK:

Politics and Stocks: Post-Midterm Returns
Post-Midterms Performance: One Year After

weekly chart of the week

Chart Courtesy of ClearBridge Investments. Source: FactSet. 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:

  • Politics can exert a significant short-term impact on stock prices. But what do longer-term data say about the relationship as we enter 2019 – the year after a U.S. mid-term election?
  • ClearBridge Investments notes that going back to 1950, with the S&P 500 up an average of 15.3% in the 12 months following midterms.
  • What’s more, the economy has not seen the start of a recession during the third year of a presidential term in the modern era. This second result may be tied to fiscal spending, which tends to be strongest during the middle of the four-year presidential election cycle.
  • For example, consumers will likely see a $60 billion boost in spending potential in 2019 from tax refunds that reflect the reduced tax rates from the late 2017 tax reform. And while the levers of government are now split between political parties, some speculate that additional stimulus could emerge from an issue that has appeal to both camps– increased spending on infrastructure.
  • While markets sometimes confound reasonable assumptions and projections, there may be reason to believe that the current worst-case assumptions about the immediate future might not come to pass.
  • For more on the issues and forces acting on the year ahead, read Market Outlook 2019: Shifting Signals for the views of Legg Mason’s none diverse investment managers.

The chart:

  • The chart shows the price performace of the S&P 500 Index on the year following each of the U.S. mid-term elections between 1950 and 2014.

All data Source: FactSet and ClearBridge Investments, unless otherwise noted.


DEFINITIONS:

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:

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.

An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

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 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.
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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.
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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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