Monday, February 4, 2019

Week In Review | Feb 4 2019

Spencer Joyce, CFA
Author position
Vice President | Markets 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.

Busy Week Rewards Investors

  • Stocks around the world rallied last week, paced to the upside by Emerging Markets as the dollar weakened slightly. The S&P 500 large-cap index was particularly strong as well. Lower interest rates in the US contributed to a positive week for bonds. Energy was the leading equity sector last week.
  • The Hilliard Lyons View: A strong January Jobs number on Friday (+304k) punctuated what we view as a relatively bullish week of news flow. Federal workers impacted by the shutdown returned to work; corporate earnings, on average, met tepid expectations. China and the United States remained actively engaged in trade talks. The most important catalyst last week however, was likely a dovish pivot from the Federal Reserve at a press conference on Wednesday, which followed their January meeting.

The most important catalyst last week was likely a dovish pivot from the Federal Reserve.

Halftime Report: Q4 Earnings Season

  • Nearly half of S&P 500 companies have reported fourth quarter results. Aggregate data thus far shows EPS growth 14.7% on sales growth of 6.2%. Growth rates are below the last few quarters, but both revenue and profit are coming in slightly ahead of consensus expectations.
  • The Hilliard Lyons View: The November/December swoon for stocks seems to have ratcheted lower expectations for this reporting cycle. Despite slower growth in Q4 than over the rest of 2018, stocks across most sectors are reacting positively to reported results. The ongoing trade spat seems to be an overhang on corporate sentiment, but for the most part, financial guidance is relatively somewhat resilient.

Yields Lower on Dovish Fed Comments

  • Yields fell last week as bond prices rallied. The spread between 2-yr and 10-yr Treasury rates expanded slightly from 15 to 18 basis points (0.15% to 0.18%). The Fed held an official press conference on Wednesday.
  • The Hilliard Lyons View: Late last year as equity markets tumbled, the Fed remained resolved to hike rates and reduce the size of its balance sheet. However, Chairman Powell struck a more measured tone last week. In many respects the Fed is catching up with financial markets, which had already been pricing in zero rate hikes in 2019. In general, lower rates and a more dovish Fed are bullish near-term for risk assets, and we believe the Fed pivot supported markets last week.

A Look Ahead

  • The Hilliard Lyons View: President Trump is scheduled to deliver the State of the Union Address Tuesday evening. We expect the President will use the bully pulpit to forward his border wall objective, but we are more interested in what other legislative priorities are allocated at speech time. Corporate earnings reports remain numerous this week. Ninety-eight S&P 500 companies are scheduled to report results, including: Google, Humana, Cummins, YUM! Brands, Clorox and Phillip Morris. Durable Goods data highlights a light week of economic reports, with GDP and Retails Sales (and others) still delayed due to the shutdown.

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.