Q2 Market Update - AssetMark

Second Quarter 2019

What To Expect When They’re Expecting

Jason Thomas, Ph.D., CFA

Chief Economist

AssetMark, Inc.

The story
At its June 2019 meeting, the Federal Open Market Committee (FOMC) left the fed funds target range unchanged. Despite a significant shift in the language in the official statement released after the meeting and the expectations of FOMC participants in the “dot plot” portion of the updated Summary of Economic Projections, Fed Chair Powell sought to downplay the certainty of a rate cut in the near future. He promised that the FOMC would “act as appropriate” with a nod towards data dependence (“will closely monitor the implications of incoming information”).

The reality
If Powell plans to do anything other than cut rates in the next few months, he has some serious work to do in the meantime. There was one dissenting vote on the FOMC in June and based on the dot plot, nearly half of the Committee (not all are voting members at this time) is projecting a cut this year.

Perhaps more importantly, the FOMC has historically avoided surprising the market by not delivering an expected rate cut. Since 1988, the Fed cut rates in all 13 instances where the futures market expected a cut in the funds rate the day prior to a scheduled FOMC meeting¹. As of the market close on July 3, the futures market is pricing a 100% probability of a rate cut at the FOMC meeting ending on July 31². One hundred percent!

The bottom line
It’s a sign of the times that the cases for and against cutting rates are both strong. A bit more than 60% of economists in the June Wall Street Journal survey expect no change at the July meeting.

But if Powell plans to do anything other than cut rates in July, he has some serious work to do in the meantime. Absent a concerted effort by Fed officials to reset market expectations, we have to assume that he plans to deliver on them.

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¹ Source: Goldman Sachs Global Investment Research.
² Source: Chicago Board Options Exchange (CBOE).

Asset Class	Index
International Bonds	Bloomberg Barclays Global Aggregate ex USD - is a flagship hard currency Emerging Markets debt benchmark that includes fixed and floating-rate US dollar-denominated debt issued from sovereign, quasi-sovereign, and corporate EM issuers. Country eligibility and classification as Emerging Markets is rules-based and reviewed annually using World Bank income group and International Monetary Fund (IMF) country classification.
High-Yield Bonds	Bloomberg Barclays US Corporate High Yield - measures the market of USD-denominated, non-investment grade, fixed-rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. The index excludes emerging market debt.
Investment-Grade Bonds	Bloomberg Barclays US Corporate Investment Grade - is a broad-based benchmark that measures the investment grade, fixed-rate, taxable, corporate bond market. It includes USD-denominated securities publicly issued by US and non-US industrial, utility, and financial issuers that meet specified maturity, liquidity, and quality requirements.
Long-term Treasuries	Bloomberg Barclays US Treasury Long - measures the performance of long term government bonds issued by the US Treasury. It includes all publicly issued, US Treasury securities that have a remaining maturity of 10 or more years, are non-convertible, are denominated in US dollars, are rated investment grade, are fixed rate, and have $250 million or more of outstanding face value.
Global Equities	MSCI ACWI – is a free float-adjusted capitalization weighted index that is designed to measure the equity performance of countries considered to represent both developed and emerging markets.
International Equities	MSCI EAFE – is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of countries considered to represent developed markets, excluding the U.S. and Canada.
Emerging Markets Equities	MSCI Emerging Markets – is a free float-adjusted, market capitalization index that is designed to measure the equity market performance of countries considered to represent emerging markets.
US Equities	S&P 500 – is an unmanaged index that is generally considered representative of the US equity market, consisting of 500 leading companies in leading industries of the US economy (typically large cap companies) representing approximately 75% of the investable US equity market.
Mid-Cap Growth	Russell Mid Cap Growth - measures the performance of the mid-cap growth segment of the US equity universe. It includes those Russell Mid Cap Index companies with higher price-to-value ratios and higher forecasted growth values.
Small-Cap Value	Russell 2000 Value - measures the performance of the small-cap value segment of the US equity universe. It includes those Russell 2000 Index companies with lower price-to-book ratios and lower expected growth values.
Gold	Bloomberg Sub Gold - is a commodity group sub-index of the Bloomberg Commodity Index composed of futures contracts on Gold. It reflects the return of underlying commodity futures price movements only and is quoted in USD.
Commodities	Bloomberg Commodities - is a broadly diversified benchmark that measures the futures contracts of physical commodities traded on US exchanges, with the exception of aluminum, nickel and zinc, which trade on the London Metal Exchange (LME). The component weightings are also determined by several rules designed to insure diversified commodity exposure.
REITS	FTSE NAREIT All Equity REITs – measures the performance of publicly traded US real estate securities, such as Real Estate Investment Trusts (REITs) and Real Estate Operating Companies.
Global 60/40 Blend	60% MSCI ACWI / 40% Bloomberg Barclays Global Aggregate – is a blend of global equities and global bonds indexes used as a benchmark for a balanced portfolio.

C19-0070 | 7/2019 | EXP 07/31/2020
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IMPORTANT INFORMATION
This report is for informational purposes only, is not a solicitation, and should not be considered investment advice. The information in this report has been drawn from sources believed to be reliable, but its accuracy is not guaranteed, and is subject to change. Investors seeking more information should contact their financial advisor. Financial advisors may seek more information by contacting AssetMark at 800-664-5345.

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Investments in mutual funds and exchange traded funds that hold equities, bonds, and other securities can decline significantly in response to adverse market conditions, company-specific events, changes in exchange rates, and domestic, international, economic, and political developments. Investments in bonds and fixed income related securities also involve market and interest rate risk (prices can decline, if interest rates increase), and default risk (an issuer being unable to repay principal and interest). High-yield bonds are generally subject to greater risk of default and volatility, than investment-grade bonds. Real estate investments are subject to credit and market risks, typically based on changes in interest rates and varied economic conditions. Investing in alternative investments, including managed futures, commodities, and currencies is not appropriate for all persons, as the risk of loss is substantial. Investments in futures involve market, counterparty, leverage, liquidity, interest rate, foreign currency, commodity, volatility, and other risks.

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Jason Thomas is also Chief Executive Officer & Chief Investment Officer of Savos Investments, a division of AssetMark, Inc. Savos Investments is a division of AssetMark.

AssetMark, Inc. is an investment adviser registered with the Securities and Exchange Commission.

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