Monday, May 6, 2019

Week In Review | May 6 2019

Ross Mayfield, CFA
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.

Stocks Up Slightly on Jobs

  • After shedding ~2% mid-week, the S&P 500 rallied strongly Friday to close right at all-time highs. Still, US Small Cap, International Developed, and Emerging Markets all outperformed US Large Cap last week. A strong Friday jobs report and a weaker dollar likely fueled markets. Oil fell further from April highs, hurting Energy performance, while Financials led.
  • The Hilliard Lyons View: Despite the potential for a challenging earnings season, the CBOE Volatility Index (VIX) closed Friday around 1-year lows, while investor sentiment has almost fully rebounded from last year’s selloff. The term “melt-up” has been used often in the media recently to describe the possibility of a slower, less-volatile market move upward in 2019. Still, while conditions do seem positive for US equities, it is at these moments of calm that we reiterate caution. Diversification, a sound rebalancing approach, and risk-taking commensurate with one’s tolerance are prudent.

The US economy added 263,000 jobs in April and the unemployment rate dropped to 3.6%

Jobs Report Blowout

  • The US economy added 263,000 jobs in April (vs. 190,000 expected) and the unemployment rate dropped to 3.6%, a new cycle low. The private sector saw healthy wage growth, up 3.2% y/o/y; labor productivity advanced at the best y/o/y rate since 2010. Inflation remains tempered.
  • The Hilliard Lyons View: Following an unexpectedly high GDP print, the US economy doubled down with an excellent Friday jobs report. We are especially encouraged to see worker productivity show strong gains. Productivity, measured generally as the efficiency of an economy’s resources (e.g., how many gadgets can one employee make in one hour of labor), is a key source of economic growth. Healthy productivity gains allow employers to raise worker pay without eating into profits or stoking higher inflation. Productivity has been disappointing since the ’08 recession, lagging historical growth, but if the Q1 figure proves resilient then strong productivity could fuel this cycle’s continued expansion.

Yields Up on Fed Decision

  • Yields rose slightly this week as the market digested positive economic news coupled with the Fed’s rate decision.
  • The Hilliard Lyons View: Chair Powell’s comments on inflation surprised markets, sending rates higher and stocks lower. The Fed viewing slowing inflation as “transitory” supports our idea that the market is assigning too high a probability of a 2019 cut.

A Look Ahead

  • The Hilliard Lyons View: With ~80% of the S&P 500 having delivered results, earnings season is beginning to wind down. Still, a handful of energy names will report this week, including Occidental Petroleum, Marathon Petroleum, Duke Energy, and Enbridge Inc.; Disney and Anheuser-Busch also report. Elsewhere, a Chinese delegation will travel to DC for ongoing trade talks. Tensions are sure to be high following President Trump’s surprise threat to escalate tariffs over the weekend.

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. Note: It is not possible to invest directly in an index. 

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.