Monday, March 25, 2019

Week In Review | Mar 25 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 Fall in Hectic Week

  • Stocks finished lower last week after a tumultuous Friday trading session erased earlier gains. Markets were likely spooked by a mix of soft global manufacturing data combined with the brief inversion of the 3mo-10yr Treasury curve. Financials were hit especially hard, shedding nearly 5%.
  • The Hilliard Lyons View: While the 2yr-10yr Treasury curve is generally the data point used when pundits broadly reference "the yield curve," the 3mo-10yr has been proven to have as much, if not more, predictive ability. Historically, the average time from inversion to recession has been significant (~2 years), and the inversion has been more predictive the larger it is and longer it holds for. This data bears close attention.

The 1-mo, 3-mo, 6-mo, and 12-mo Treasuries are currently yielding more than the 10-yr.

Fed More Dovish Than Expected

  • As expected, the FOMC left the target federal funds rate unchanged following their meeting last week. Still, the market seemed surprised by the overall dovishness of the FOMC statement and Fed Chair Powell’s subsequent comments. Rates tumbled to 2019 lows, while the yield curve inverted. The market is now projecting 0% chance of a rate hike in 2019, which is corroborated by the Fed’s “dot plot.” The FOMC also noted that their balance sheet runoff program will cease in September 2019.
  • The Hilliard Lyons View: Fed-watching is a tricky practice. Had the FOMC been hawkish, markets may have fallen in anticipation of rate hikes. However, the Fed’s perceived over-dovishness may have equally spooked stocks, which now seem concerned that the economy is slowing more than was previously priced in. Still, it is hard not to have a positive view of US equities given the current environment. Rate hikes are on an indefinite pause and the economy, while slowing, still trudges on. Strong employment and wage growth should fuel the consumer, while increased business investment could boost productivity and help extend the cycle.

Rates Tumble; Some Curves Invert

  • Mid- and long-term yields declined for the fourth straight week, boosting bonds. The 1-mo, 3-mo, 6-mo, and 12-mo Treasuries are currently yielding more than the 10-yr.
  • The Hilliard Lyons View: The Barclays Agg had its best week since September 2018, making a strong case for diversification.

A Look Ahead

  • The Hilliard Lyons View: A few geopolitical items to watch this week. U.S. Trade Rep. Lighthizer and Treasury Secretary Mnuchin head to Beijing with significant trade-related hurdles to address. Brexit faces another test following a 2-week extension granted by the EU. Finally, we will be watching markets as they digest the release of the Mueller report concerning the 2016 election; this removes a significant source of uncertainty from markets. In economic news, 2018 Q4 GDP is expected to be revised lower Thursday.

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.