Monday, January 14, 2019

Week In Review | Jan 14 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 Start Hot In 2019

Equities performed well in the first full week of 2019. Small caps have led the way so far, posting gains in the last 6 sessions; the Russell 2000 is now outperforming the S&P 500 by ~4% YTD. High yield spreads have tightened by nearly 100 bps since early January, thanks largely to shifting sentiment and firming oil prices. The VIX hit a 1-mo low Friday.

The Hilliard Lyons View: Small caps have gained over 14% off of Dec. 24 lows. As the risk of a Fed overshoot fades somewhat, we expect the trade war with China to emerge fresh into the headlines. As we saw last summer, trade unease can be a boon for more insulated, domestic-oriented small caps. Largely removed from tariff noise and currency fluctuation, US small cap performance is more of a referendum on US businesses and local economic strength. With record low unemployment and a healthy US consumer, we are watching small caps closely to see if the outperformance trend from the first half of 2018 will resume.

Small caps have gained over 14% off of Dec. 24 lows.

Shutdown Grinds On

The partial government shutdown became the longest in US history this weekend. President Trump and Congress remain at an impasse, with funding for the Administration’s proposed border wall the major sticking point. Many federal workers missed their first paycheck on January 11.

The Hilliard Lyons View: Markets loathe uncertainty. While stocks have held up well during past shutdowns, the ramifications of the current gridlock will soon begin to be felt. For instance, the partial closure at the SEC has frozen the IPO market. Air & food safety are other major areas of concern, while understaffing across government agencies has increased the wait time for applications, permits, and loans. Perhaps most importantly, the strength of the US consumer is at risk. CNBC estimates that over $2 billion in consumer spending was eliminated from the economy when 800,000 furloughed workers missed Friday’s pay.

Yields Pop, Curve Dips

Yields moved up last week, while the 2-10 spread narrowed to 16 bps. The belly of the curve remains atypically depressed.

The Hilliard Lyons View: The 1yr-7yr spread is essentially flat, while the 3-yr Treasury represents the low point on the curve. The yield curve’s shape remains worth monitoring – see last week’s Chart of the Week, Yield Curve Twists, for a primer on the unusual activity.

A Look Ahead

The Hilliard Lyons View: This week should not lack for news items. Earnings season kicks off with a bevy of financial firms. JP Morgan, Citigroup, Bank of America, Wells Fargo, and Goldman Sachs report, among others; Netflix also delivers results Thursday. In economic releases out this week, we’ll get a mixed bag of inflation, housing, employment, and consumer data. Finally, as the shutdown drags on, we will be closely watching both sides for any inkling of a deal or compromise.


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.