Monday, June 24, 2019

Week In Review | June 24 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.

Risk Assets Rally

  • The S&P 500 finished up 2.2% last week, posting multiple new all-time highs on its way to a third straight week of gains. Emerging markets outperformed, posting a 3.4% gain on USD weakness and global central banks dovishness. Oil (and Energy) rallied on Iran turbulence.
  • The Hilliard Lyons View: "Don't fight the Fed." Famed investor Marty Zweig's words rang especially true last week. With the ECB hinting at additional easing and the Federal Reserve setting themselves up to cut rates, stocks got the juice they needed for another strong week. It would seem that the rally in stocks is less about interest rate mechanics and more about investor confidence. To that end, Federal Reserve Chair Powell reinforced that he will do what needs to be done to extend the economic cycle. A sustained weaker dollar would be an additional boost to US multinationals, while oil popping led Energy to its best week in over a year.

The Federal Reserve left rates unchanged at their June meeting, but opened the door to cutting.

Fed Holds Firm, Hints at Cut(s)

  • The Federal Reserve left rates unchanged last week, but opened the door to cutting sometime later this year, perhaps as early as July. According to the Fed “dot plot,” seven of the seventeen FOMC members now see multiple rate cuts this year as appropriate. Fed Fund Futures are pricing in a 100% probability of a cut at the July meeting.
  • The Hilliard Lyons View: The idea of cutting rates may seem at odds with an S&P 500 at all-time highs and unemployment at 50-year lows. Still, given the low level of rates this cycle, one could reasonably be concerned about the amount of ammunition the Fed has to combat a recession. Easing now could be considered an “insurance cut.” Following Wednesday's meeting, Powell quipped that “an ounce of prevention is worth a pound of cure,” reinforcing the view that cutting would be largely preemptive. Though some pockets of economic data are soft, the US consumer is still healthy and leading economic indexes are near all-time highs. The Fed likely believes proactive cutting could help support the economy in the event of an extended and/or escalated trade war.

Yields Drop Again

  • Treasury rates tumbled yet again, marking the seventh week in a row that the 2-yr and 10-yr have finished lower.
  • The Hilliard Lyons View: Despite the continued move lower in rates, the various yield curve measurements are looking more positive as markets anticipate easing. Despite the rally in stocks, the Barclays Agg posted its 9th positive week of the last ten.

A Look Ahead

  • The Hilliard Lyons View: Geopolitics reign supreme this week. Global investors will be on edge as they await the “extended” Trump-Xi meeting at the G20 Summit this weekend. The meeting should mark a major inflection point (to the up- or downside) in the escalating US-China trade war. Meanwhile, we also will be closely monitoring the ongoing situation Iran. President Trump is planning new sanctions for the country as tensions mount in Europe and the Middle East.

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.