Monday, February 11, 2019

Week In Review | Feb 11 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.

US Leads

  • Global equities were mixed last week, although bonds provided a level of protection as prices rallied and yields declined. US stocks outperformed international markets, due in part to a stronger dollar. Bloomberg’s US Dollar Spot Index gained over 1% last week, its strongest since August. Sector performance was mixed. Energy lagged on lower crude oil prices, while Utilities played catch up after trailing the market in January.
  • The Hilliard Lyons View: Moves last week seem rational. Incremental earnings data was good-but-not-great (by recent standards), and sufficient to support US stocks given lower expectations. That said, the international narrative seems more focused on weakening economic data abroad. We expect this split between US resiliency versus slowing elsewhere impacted most markets, from currencies to equities to energy.

By historical standards, the President outlined few legislative priorities during the State of the Union.

State of the Union Address

  • President Trump spoke to the American people from Congress on Tuesday. He advocated for border security and military funding, as well as lower prescription drug prices, infrastructure investment and enhanced parental leave. He also touted US job growth and current economic momentum.
  • The Hilliard Lyons View: By historical standards, the President outlined few legislative priorities for the year ahead. But the items he did highlight seem to be areas where compromise with Democrats could be possible. We do not identify much from the speech that materially impacts our investment views, although we do see added risk in the Pharmaceutical space.

Profitable Week for Bondholders

  • Yields fell last week as bond prices rallied. Total return for the Barclays US Aggregate index, which is weighted toward US Treasuries, was +0.4%. The spread between 2-yr and 10-yr Treasury rates contracted slightly.
  • The Hilliard Lyons View: The strength in Treasury bonds last week flows a bit counterintuitive to a resilient week for US equities (especially outperformance for small caps). However, strength for bonds in the broader context of a mixed week for global assets and a strong week for the US dollar makes more sense. We are pleased to see another week pass with 10-year yields remaining above 2-year yields (i.e., curve not inverted).

A Look Ahead

  • The Hilliard Lyons View: Earnings season begins to wind down this week, though 63 members of the S&P 500 are still scheduled to report results over the next five days. Noteworthy reports include: Coca-Cola, Pepsi, Nvidia, Cisco, Duke Energy, Deere and Waste Management. Stopgap funding that ended the government shutdown runs out late this week, and we expect negotiations on this front to be a market narrative this week. Separately but related, we expect ongoing trade negotiations with China to have an impact on market psyche as news breaks. We remind investors that new tariffs are scheduled to take effect March 1.

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.