Monday, February 25, 2019

Week In Review | Feb 25 2019

Ross Mayfield, CFA
Author position
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

  • Stocks finished higher in a shortened week. The S&P 500 is currently on a four-week winning stretch, its second such streak of 2019. Materials and Utilities led the way. Despite a volatile past half-year, many major US indices finished Friday just a few percentage points off of all-time highs. The CBOE Volatility Index (aka, the VIX) closed at a 20-week low.
  • The Hilliard Lyons View: We believe solid earnings combined with a reset of lofty growth expectations have been supportive of equities. With 89% of S&P 500 companies reporting Q4 earnings thus far, 69% have shown a positive EPS surprise and 61% have shown a positive revenue surprise. All 11 sectors are reporting y/y revenue growth. Looking forward, we are intrigued by the wide margin between projected 1Q19 earnings and sales growth. (The S&P 500 is projected to report a y/y earnings decline of 2.7%, but revenue growth of 5.2%, per FactSet.) While input cost inflation and the declining impact of tax cuts may be curbing profit margin expectations to an extent, strong sales figures are still instructive of a healthy economy.

The S&P 500 is currently on a four-week winning stretch, its second of 2019.

Fed Minutes Reveal Dovish Tone

  • The FOMC released minutes from their January meeting on Wednesday. As expected, the Fed took a more dovish tone than they projected just a few months ago. The committee noted global economic risks as a main reason for pause, while also detailing decreasing concern about an upside inflation surprise. Stocks reacted minimally.
  • The Hilliard Lyons View: The continuing dovish rhetoric from the Fed is constructive for equities in the near-term, but questions over a "Powell put" remain. If market volatility in 4Q18 led to the Fed’s pause, then a strong market rebound in 2019 could give room for a hawkish turn. Currently, the market is pricing in just a 2% chance for a 2019 rate hike. We believe this is too low. A resolution of the US-China trade war combined with continued consumer strength could give the Fed an opportunity to boost rates a few more times before the end of this economic cycle.

Rates Steady, Spreads Tight

  • Rates popped slightly on the Fed minutes release, though the 2- and 10-year yields remained range bound.
  • The Hilliard Lyons View: The 10-year hovers around 12-month lows, keeping pressure on the increasingly tight 2-10 spread. We remain vigilant in monitoring this key recession indicator.

A Look Ahead

  • The Hilliard Lyons View: Earnings season is wrapping up, but several S&P 500 firms are reporting this week. The consumer will be in focus as Home Depot, Lowe's, and Booking report. In trade-war news, President Trump extended the self-imposed March 1 deadline for a US-China pact this weekend, describing the latest round of talks as "very productive." Discussions will continue this week. Finally, the initial reading of Q4 GDP is released Thursday, with most projections in the 2.0-2.5% range.

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.