MRM Commentary


Monthly Investment Commentary

JUNE 2019

    Economic & Market Overview

    First down month for equities in 2019:
    Stocks were under heavy pressure in May as a ramp-up in trade tensions dimmed the outlook for global economies. The breakdown in trade talks with China and unexpected plans to add tariffs on goods from Mexico set off a rush towards safe haven assets, sending U.S. stocks to their worst May performance in nine years. Risk-off sentiment prevailed across global markets, with foreign developed and emerging market equities also moving solidly lower for the month.

    What worked in May?
    With the exception of the Real Estate sector, which benefited from falling rates, there were no places to hide in May. More defensive Healthcare and Utilities sectors were better cushioned against the declines while the more trade sensitive Technology, Materials, and Industrials sectors underperformed. The Energy sector performed the worst, posting double-digit declines for the month, due to a big sell-off in crude oil. Investors had a slight preference for larger capitalization and growth-oriented stocks.

    MRM Group claims compliance with the Global Investment Performance Standards (GIPS®).
    Please contact MRM Group to obtain a Compliant Presentation and/or MRM's list of Composite descriptions.

    MRM Portfolio

    Bond markets concerned about outlook:
    Global yields dived during the month as trade uncertainty, disappointing economic data, and a rise in world central bank rate cuts pointed to easier monetary policies ahead. Rates on U.S. Treasuries dropped across the board, with the yield on 10-year U.S. Treasury bonds falling 37 basis points to 2.14%, the lowest level in 20 months. Most notably, parts of the yield curve inverted for a second time this year, fueling worries about the economic outlook. Spreads on high yield and investment grade credit widened, yet remained significantly below December levels.

    Deal or no deal:

    For more than a year, financial markets have focused on U.S. trade deals with Europe, Asia, and North America. The consensus has always been that deals would be reached with each region. The announcement last fall of a U.S.-Mexico-Canada NAFTA replacement was positive. In May, Chinese trade talks not only collapsed but existing tariffs were increased and bath countries appear to be targeting each other's companies. The administration gave itself an additional six months to put tariffs on Japanese and European cars and announced new tariffs on 100% of Mexican imports. At this point, all bets are off for quick and comprehensive deals. The high level of trade uncertainty has led to an unstable business environment which has reduced business investment. U.S. economic growth has slowed and growth overseas is even slower. Morgan Stanley and other investment banks have highlighted that rising trade tensions increase the chance of an economic slowdown or a recession. All eyes will be on the G20 Summit in Japan to see if trade tensions can be reduced.

    Earnings recession?

    U.S. GDP growth in the first quarter was revised down slightly from 3.2% to 3.1%. While this isn't a significant amount, the source of the downgrades—lower corporate profits and investments—is concerning. In fact, profits of U.S. corporations have actually fallen for two consecutive quarters, which is the definition of an earnings recession. According to FactSet Earnings Insight, the earnings of public companies, as measured by the S&P 500 Index, fell slightly in the first quarter of 2019 and are currently expected to fall in the second quarter. Estimates for the fourth quarter this year are more positive, with S&P 500 year-over-year earnings growth expected to be 8%. But as the economy has moved later in the economic cycle and the one-time boost from tax reform has fallen away, even this growth is well below 2018's S&P 500 earnings growth of more than 20%.


    We are positive on the market and we view the May sell-off as an opportunity.

    Source: SunAmerica

    MRM model holdings as of March 31, 2019



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