Monday, May 20, 2019

Week In Review | May 20 2019

Spencer Joyce, CFA
Author position
Vice President | Markets 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.

A Risk-Off Week

  • The S&P 500 dipped nearly 1% last week as the index posted its first back-to-back weeks of decline since December. US small caps fared even worse, as did Emerging Markets, although lower interest rates boosted Treasury bonds. Yield-sensitive sectors Utilities and Real Estate outperformed.
  • The Hilliard Lyons View: We attribute much of the market action last week to follow-through effect from the abrupt breakdown in US/China trade negotiations. An acute rally for the US dollar likely weighed on Emerging Markets. US earnings season has slowed (recap below) and we identify little in last week’s economic data that might materially shift sentiment.

Trade pivots last week seem to be good politics.

Trade War Pivot Points

  • In addition to a ratcheting higher of tariffs against China, several other items broke last week. The US agreed to lift steel and aluminum tariffs on Mexico and Canada (NAFTA partners), and the Trump Administration delayed auto tariffs on the European Union. The US also ‘blacklisted’ Huawei, a Chinese hardware firm, which precludes US firms from doing business with them.
  • The Hilliard Lyons View: The Administration made moves last week along two strategic lines. First, they are lining up allies (NAFTA, EU) to better focus on a single theatre of battle (China). Second, these moves seem to be good politics. A tough stance on China has support from various pockets of both political parties, and suppressing auto uncertainty plays well in Midwest swing states like WI and MI (the risk would be EU retaliation).

First Quarter Earnings Recap

  • The S&P 500’s Q1 reporting cycle is nearly complete, with only 41 stocks left to report. All 11 sectors are beating consensus profit expectations, and the index is on pace to grow earnings by 1.4% on sales growth of 4.5%.
  • The Hilliard Lyons View: Profit growth is slower than we saw across 2018, but this has been a very strong cycle relative to expectations. Just a handful of weeks ago there were fears that earnings would be down (i.e., a profit recession), but we are confident at this point that earnings growth for the first quarter will indeed be positive.

A Look Ahead

  • The Hilliard Lyons View: Retail will be in focus from an earnings perspective this week; many retailers report February-April quarters instead of January-March, which pushes back their release dates relative to the market. 21 S&P 500 companies are confirmed to report, including: Best Buy, Target, Lowe’s, Home Depot, TJ Maxx, AutoZone, Kohl’s, and HP Inc. Given a light week for economic data, geopolitics is likely to remain in focus. Tensions continue to increase surrounding Iran, and incumbents won re-election in both India and Australia. Either of these could have spill-over effect on the global narrative, but especially India, which is a key Emerging Market. We expect US companies will discuss ramifications of the Huawei blacklisting this week, but with no trade talks scheduled until Trump and Xi meet in June, we expect little primary trade news this week.

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.