Monday, May 13, 2019

Week In Review | May 13 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.

Tariff Tensions Shake Markets

  • Trade news rocked markets last week, as President Trump’s tariff threat materialized and talks with China stalled. The S&P 500 shed ~2.1% for its worst week YTD, led downward by the more globally-oriented Technology and Discretionary sectors. Emerging Markets had its worst week in over a year, and the MSCI China Index shed ~6%.
  • The Hilliard Lyons View: Just as markets were feeling a little too calm, volatility returned in force last week thanks to a few geopolitical items. Trade news dominated the headlines (more below), but the brewing conflict between Iran and US/Europe should not be ignored either. On China, because a trade deal was likely priced into markets, stocks capitulated at the recent setback. We expect volatility to stay elevated throughout the remainder of the discussions, both in the markets and the headlines.

Emerging Markets had its worst week in over a year, and the MSCI China Index shed ~6%.

Trade War Re-Escalates

  • The Trump Administration increased tariffs from 10% to 25% on $200 billion in Chinese goods Friday, with additional tariffs being prepared. China stated that it will retaliate to this action, though talks ending last Friday were “constructive” according to Treasury Secretary Mnuchin.
  • The Hilliard Lyons View: This is a disappointing turn of events. While we do not fully fault the Trump Administration for threatening to walk away from the table following perceived dishonesty on the part of Chinese negotiators, the result is still a net economic negative. Rhetoric aside, we feel it is worth reiterating that tariffs are taxes paid directly by the American companies importing goods and not by the countries upon which tariffs have been levied. With that in mind, our friends at Strategas estimate that current tariffs will reduce US GDP by 0.5% per year and China GDP by 1.0% per year. Should tariffs increase further, recession risk rises substantially. The range of outcomes for the trade war has widened significantly, and as we note above, elevated volatility should be expected going forward.

Rates Down as Investors Seek Safety

  • Rates tumbled this week as global growth concerns flared up.
  • The Hilliard Lyons View: As of Monday 5/13, the 2-year Treasury yield was at its lowest point since February 2018. Though the domestic economy still appears healthy, escalating trade tensions could lead to a more dovish Fed later this year.

A Look Ahead

  • The Hilliard Lyons View: Though earnings season is wrapping up, three of the biggest consumer companies in the world will report this week, as Alibaba, Walmart, and Tencent deliver results. This week delivers a mixed bag of domestic economic data for investors to parse, but ultimately all eyes will be on the US and China. The week ahead promises no lack of drama from the world’s two biggest economies, as the trade war that looked to be winding down has re-escalated with force. Specifically, we will be keenly watching China’s strategy for retaliation.

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.