Monday, April 29, 2019

Week In Review | Apr 29 2019

Ross Mayfield, CFA
Author position
Author position Correspondent Research Analyst

The Investment Strategy & Research team of Hilliard Lyons, A Baird Company, supports you and your Wealth Advisor with investment guidance to help you separate meaningful news from idle noise via timely market commentary.

US Stocks Up, S&P 500 Makes New High

  • US markets rallied last week. The S&P 500 closed at a new all-time high Friday afternoon following a strong Q1 GDP print and some positive earnings sentiment; and the Russell 2000 closed at a new 2019 high. International stocks tumbled, however, as the dollar was broadly stronger.
  • The Hilliard Lyons View: Despite the negative sentiment entering Q1 earnings season, US companies have proven more resilient than expected. With about half of S&P 500 companies having delivered results, 77% have reported a positive surprise on earnings. This trend is being led by the more cyclical Technology and Consumer Discretionary sectors. Further, the market is reacting as one would expect - rewarding positive surprises (+1.2% on average) and punishing negative surprises (-3.2%) in the days surrounding releases. We believe the resetting of expectations during the 2018 bear market was important in this regard.

The US posted a higher-than-expected Q1 GDP of 3.2% on Friday

GDP Surprises to the Upside

  • The US posted a higher-than-expected Q1 GDP of 3.2% on Friday; consensus estimates had been in the 2.0-2.5% range. Rising net exports, higher inventory investment, and a strong contribution from state & local government spending boosted the figure, among other items.
  • The Hilliard Lyons View: We are encouraged to see 3.2% when as recently as March the consensus estimates were half that. However, like 2Q18, it’s possible that higher-than-average inventory builds and net exports could be a result of late-2018, early-2019 trade uncertainty. Consumer spending weakened, and housing was a drag for the fifth straight quarter. Still, we remain bullish on the US economy. We expect positive trade developments, strong employment, rising wages, and accommodative Fed policy all to contribute to economic strength heading into the second half of the year.

Yields Tumble

  • Yields fell last week, and the 2yr/10yr spread hit its largest gap of 2019.
  • The Hilliard Lyons View: The belly of the yield curve remains oddly shaped, but following last month's inversion chaos, we welcome the widening of important Treasury spreads.

A Look Ahead

  • The Hilliard Lyons View: Earnings season rolls on with 164 companies set to report this week (plus #165, Berkshire Hathaway, on Saturday). The Healthcare sector will be in focus with companies like Merck, Pfizer, Cigna, Eli Lilly and Gilead on the docket. Others reporting: Google, Mastercard, Cummins, General Electric, YUM! Brands, Dominion Energy, and American Water Works. Looking to the economic calendar, the Fed is set to have their 3rd meeting of 2019 this week. No change to rates is expected, though investors will closely watch Chair Powell's comments to gauge sentiment. Finally, trade talks with China resume in Beijing this week, although we believe it is still likely to be several weeks before any final deal is announced.

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, A Baird Company, 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. Diversification 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.