Monday, March 4, 2019

Week In Review | Mar 4 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 Grind Higher Amid News Flurry

  • Stocks finished slightly up last week, as Friday’s gains reversed earlier losses. Investors grappled with US-China trade news, the North Korea summit, Michael Cohen’s testimony, and the US GDP release, among other items. Tech stocks led the way, while Emerging Markets were a laggard.
  • The Hilliard Lyons View: Markets have largely shrugged off a subpar earnings season, as both positive and negative surprises have yielded higher-than-average price moves. Industrial and Technology stocks have been a bright spot, reporting the two highest earnings beat rates. The S&P 500 Technology sector is on a 10-week winning streak.

This brings 2018 GDP growth to 2.9%, tied for the single best year since 2005.

Initial Q4 GDP Release Beats Estimates

  • The Bureau of Economic Analysis reported initial Q4 GDP growth of 2.6% Thursday, beating most estimates. Consumption and nonresidential business investment grew healthily, offsetting a slowdown in private inventory investment and dip in net exports from Q3. This brings 2018 GDP growth to 2.9%, tied for the single best year since 2005.
  • The Hilliard Lyons View: The inventory slowdown could have been expected, as Q3 featured a larger-than-usual inventory build in an effort to front-run tariffs. The nonresidential business investment (i.e., capex) growth is a positive; the 2017 tax bill may largely be judged on its ability to stimulate capex spending, which benefits businesses & economies far into the future. Robust research & development spending is also significant.

Notes from a Trade War

  • The US seems to be preparing a final trade deal for Presidents Trump and Xi to sign sometime mid-March. Weeks of productive talks ended with President Trump and top negotiator Robert Lighthizer cancelling a planned tariff hike on March 1, with cautious optimism coming from key figures.
  • The Hilliard Lyons View: The contents of the deal will be crucial, but a resolution to the multi-year trade spat should be welcomed by markets. We will reserve judgement until pen is put to paper, however. As details surrounding key trade items are still being finalized, the possibility for talks to break down remains a risk.

Rates Jump on GDP

  • Rates rose last week following the mostly positive GDP release. The 2/10 spread topped 20 bps for the first time in 2019.
  • The Hilliard Lyons View: Both GDP beating estimates and the yield curve steepening are constructive for US equities.

A Look Ahead

  • The Hilliard Lyons View: Trade war news should rightly lead the news cycle this week, though an official deal is not expected to be signed until mid-to-late March. On the economic calendar, ISM Non-Manufacturing PMI is out Tuesday morning. The US will hope to reverse a declining trend in this index. Finally, Costco, Salesforce, Brown-Forman, and Target report earnings.

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.