Monday, January 7, 2019

Week In Review | Jan 7 2019

Ross Mayfield, CFA
Author position
Correspondent Research Analyst

Hilliard Lyons’ Investment Strategy & Research team is dedicated to supporting you and your Wealth Advisor. We provide investment guidance and help you separate meaningful news from idle noise via timely market commentary.

Stocks Finish Volatile Week Strong

  • Despite the shortened week of trading, there was no lack of excitement in markets. Stocks finished the volatile week on a high note, when Friday’s gains offset earlier losses. Last week, 2019 saw its first three sessions feature moves of 2% or more (2017 finished with zero). Cyclicals outperformed on the week, led by a strong start from energy stocks.
  • The Hilliard Lyons View: Amid a week of market-moving news, perhaps the biggest story was Apple cutting guidance for the first time in 15 years. Citing trade tensions, Apple attributed the revision to low iPhone sales in China, renewing fears of a global growth slow-down. While this is possible (and the trade war has certainly begun to make its impact felt), we resist the urge to extrapolate the Apple news too broadly. Apple faces increasingly strong competition in the largely commoditized smart-phone market, and recent iPhone price increases (plus a strong dollar) have hurt sales. Apple’s revision is a black mark for one of America’s flagship companies, but we urge subtlety in inferring the global economic impact.

Last week, 2019 saw its first three sessions feature moves of 2% or more (2017 finished with zero).

Economic Data Mixed

  • Institute for Supply Management Manufacturing PMI for December fell sharply, declining from 59.3 to 54.1. In better news, nonfarm payrolls exceeded expectations, adding 312K jobs in December, while year-over-year wage growth hit 3.2%.
  • The Hilliard Lyons View: Markets struggled to reconcile soft manufacturing data with the continued economic health of the US consumer last week. 2018 was the best year for job growth since 2015, and saw manufacturers add the most jobs in over 20 years. Meanwhile, wage growth hit a decade high. While the PMI data remains worth monitoring, we again look to the consumer as the driver of the US economy. With Friday’s jobs report, among other items, we see minimal risk of a near-term recession.

Treasury Yields Decline, Curve Kinks

  • Yields declined rapidly last week before recovering somewhat, while the 2/10 yield curve settled at 18 basis points.
  • The Hilliard Lyons View: The yield curve acted strangely last week as short-term rates jumped up, while the middle of the curve (2-, 3-, 5-, 7-yr) sank. The closely watched 1yr-10yr spread closed to a single basis point before widening at week end. Many are attributing the odd activity in the bond market to the expectation of a possible Fed policy mistake in 2019.

A Look Ahead

  • The Hilliard Lyons View: Earnings season will not begin in earnest for a few more weeks, but we will be watching Delta reporting Wed.; airline stocks fell last week on the company’s revised guidance. In Washington, we hope to see progress toward ending the government shutdown. Friday, Jan. 11 will mark the first missed paycheck for many public employees.

Key Definitions

  • S&P 500 – index composed of ~500 large-cap US equities listed on the NYSE or NASDAQ.
  • Russell 2000 Index – index composed of ~2000 small-cap US companies.
  • MSCI EAFE – index composed of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East. This index does not include US or Canadian companies.
  • MSCI EM - index composed of large and mid-cap securities across 24 emerging markets.
  • Bclys US Agg – (Bloomberg Barclays US Aggregate Total Return Bond Index, Unhedged) total return bond index composed of taxable, dollar-denominated debt.
  • Oil--WTI – represents West Texas Intermediate Crude Oil, a grade of light crude oil used as the underlying commodity in many indices and futures contracts.
  • Oil--Brent – represents Brent Crude Oil, a grade of light crude from the North Sea used as a global benchmark price.
  • IG Spread – (Investment Grade Spread, Bloomberg Barclays USD Liquid IG Corp Average OAS) represents the yield difference between an index of investment-grade rated bonds and a spot Treasury bond curve.
  • HY Spread – (High Yield Spread, Bloomberg Barclays US Corporate HY Average OAS) represents the yield difference between an index of below investment-grade rated bonds and a spot Treasury bond curve.

Important Disclosures

Each client’s investment needs, risk tolerance, and goals are different. This newsletter is not meant to be advice for any specific investor. Nothing in it should be construed as an offer to sell, or a solicitation of an offer to buy, any securities. This should not be used as the sole basis for an investment decision. Any opinions or estimates are subject to change without notice. For information about how any of this information applies to your personal financial situation, please contact your Wealth Advisor.

Past performance is not a guarantee of future results.

Although the information provided to you in this newsletter was obtained or compiled from sources that we believe are reliable, J.J.B. Hilliard, W.L. Lyons, LLC cannot, and does not, guarantee that the information or data is accurate, timely, valid, or complete.

All investing involves risk, including the possible loss of principal. You should carefully consider investment objectives, risks, charges, and expenses of any investment before investing. Diversi-fication and asset allocation do not guarantee a profit or guarantee against a loss.

Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market or economic developments. The bond market is also volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect can be more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks.