Monday, June 3, 2019

Week In Review | June 3 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.

US Stocks Wrap Historically Bad Month

  • The S&P 500 fell 2.6% last week, establishing May as one of the worst months of the last decade (-6.6%). All 11 sectors finished negative last week; Energy led the way, shedding 4.5% as oil hit a new multi-month low. Emerging Markets were a lonely bright spot, gaining over 1%.
  • The Hilliard Lyons View: While the Mexico tariff news (addressed below) became the key story in markets Friday, we attribute much of the continued equity weakness to the ongoing China trade tensions. Oil is down ~20% off April highs and futures are now pricing in a 97% chance of a ‘19 rate cut. Markets are clearly concerned about the outlook for global growth. As talks have deteriorated, ISR is looking to a possible Trump-Xi face-to-face at the G20 Summit in late June for further clarity. We think it is fair to say that the near-term outlook for the global economy may hinge on the outcome of this (potential) meeting.

Oil is down ~20% off April highs and futures are now pricing in a 97% chance of a ‘19 rate cut

A Trade War on Two Fronts

  • In a Thursday night tweet, President Trump announced that the US will impose a 5% tariff on all Mexican imports beginning June 10th. The tariffs, which he stated will escalate over time, are aimed at curbing illegal migration at the Mexican border. The Peso fell sharply on the news.
  • The Hilliard Lyons View: While Coronas and avocados come to mind, the lion’s share of US-Mexico trade consists of cars, trucks, and automobile parts. The S&P 500 Auto Components Index was down ~6% Friday. Further, unlike China, a majority of Mexican imports are intra-company, meaning that there is a higher level of supply chain risk to US firms (think Ford importing transmission parts). This makes the tariff threat both harder to quantify (in terms of GDP effect) and more complex to deal with at the company level. Further muddying the picture, Robert Lighthizer, the President’s top trade adviser, opposed Mexican tariffs on the grounds that they may threaten the increasingly shaky USMCA (“new NAFTA”).

Bonds Jump as Investors Seek Safety

  • Treasury yields plummeted last week, as investors sought safe haven investments in the face of global market turmoil.
  • The Hilliard Lyons View: The 10yr Treasury finished at 2.15% Friday, a 21-mo low, while the 3mo-10yr curve inverted its most since May 2007. The Barclays Agg has now outperformed the S&P 500 by ~6% since the trade war began 18 months ago.

A Look Ahead

  • The Hilliard Lyons View: Though earnings season is all but wrapped up, a few large-caps have yet to report. Kraft-Heinz, Brown-Forman, and Salesforce.com all deliver results. US PMI data and the May jobs report are also out this week, highlighting a relatively busy couple of days for economic news. Finally, all eyes will be on D.C. as the trade war(s) ramp up. While talks with China have stalled for now, there is sure to be no shortage of news from the newly established US-Mexico tariff scrum.

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.