Tuesday, January 22, 2019

Week In Review | Jan 22 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 Continue Winning Streak

  • Equities finished their fourth straight week of gains on Friday, now up ~14% from Christmas Eve lows. Financials led the way, returning over 6% on the week following well-received earnings reports from several industry-leading firms. Year-to-date, energy is the market leader, having returned 11.2% in conjunction with a nearly 20% pop in oil prices. A rebound in oil would be constructive to avoiding a global slowdown.
  • The Hilliard Lyons View: It seems that positive developments on the trade war outweighed lingering uncertainty on the government shutdown last week, boosting stocks. While far from completion, the negotiations are surrounded by optimism. Reports out of the White House noted that Treasury Secretary Mnuchin has floated reducing (or eliminating) tariffs in favor of long-term concessions from China. We believe this would be an optimal scenario. While the US needs to establish a harder line around items like intellectual property theft and technology transfer demands, any frictions on international trade are generally negative for businesses. We are cautiously optimistic at the progress of these latest talks.

Year-to-date, energy is the market leader, having returned 11.2%.

Brexit Update

  • Tuesday, PM Theresa May’s Brexit deal was routed in parliament by the largest margin of defeat in over 100 years. The next day, she narrowly survived a second vote of no confidence (in as many months). The UK’s attempt to separate from the EU remains disconcertingly messy.
  • The Hilliard Lyons View: Despite handing May the worst defeat in House of Commons history, parliament voted to keep her in power less than 24 hours later (to avoid an undesirable general election). Britain is hurtling toward either an extension of the March 29 deadline (which would need to be approved by all 27 EU nations, none of whom are too sympathetic to the UK at this point) or the economic catastrophe of a no-deal, “hard” Brexit. With just 66 days left on the clock, there is no obvious conclusion.

Yields Rise

  • Yields rose for the third straight week and the 2/10 spread widened slightly.
  • The Hilliard Lyons View: Following the last few weeks of unusual activity, the yield curve is looking normal again. We read the curve’s kinked shape as market anticipation of a 2019 Fed mistake; that fear has since eased significantly. Markets responded well to New York Fed President Williams’s comments Friday, as he reiterated the Fed’s data-driven approach.

A Look Ahead

  • The Hilliard Lyons View: Earnings season ramps up, as over fifty S&P 500 companies deliver results. Johnson & Johnson, IBM, and Procter & Gamble are among the firms reporting. In economic news, investors will get housing data throughout the week. Disappointingly moderate home sales and construction data could rebound as mortgage rates continue their decline.

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.