Monday, July 8, 2019

Week In Review | July 8 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.

Stocks Start Strong

  • The S&P 500 started the second half of 2019 strong, gaining almost 2% in the holiday-shortened week. Comm. Services, Real Estate and Tech led the way, while Energy fell as oil pared June gains. Global stocks & Small Caps rose, but continue to lag YTD; Bonds fell on the jobs data (more below).
  • The Hilliard Lyons View: Despite a low-volume week, stocks enjoyed solid gains, building on June momentum. Friday was perhaps most interesting, as stocks sold off sharply following the morning Jobs release only to gain it mostly back over the course of the afternoon. It seemed that investors were trying to decide if good news really was good news or not. That is, strong jobs data may prompt the Fed to reconsider the rate cut the market wants, but it also means that 224,000 Americans have jobs who previously didn’t. So possibly tighter monetary policy vs. a healthier consumer base. Certainly, the Fed will have an interesting decision in three weeks.

US employers added jobs for a record 105th month in a row, beating expectations handily

Jobs Data Trounces Expectations

  • US employers added jobs for a record 105th month in a row, beating expectations handily with 224K added in June. Hiring was broad-based, with gains in manufacturing, healthcare, and construction sectors. Wage growth stalled at 3.1%, while unemployment ticked up to 3.7%.
  • The Hilliard Lyons View: Though a July rate cut seems all but certain, June’s blowout Jobs report could muddy the waters. Yet despite the great numbers, the Fed may still see enough reason to cut rates. Inflation has lagged consistently this cycle, and recent wage growth stagnation reinforces this concern. Further, Monday’s PMI data showed both US manufacturing and non-manufacturing expanding, but at slowing rates. Global manufacturing PMI data is even softer, with major areas (Euro-area, UK, Japan) in full contraction. The Fed will likely weigh these factors heavily in their decision, and won’t be overly reactive to an (often) noisy jobs report. Markets are pricing in a 96% chance of a 25bp cut at July’s meeting.

Rates (Finally) Rise

  • Yields across the curve jumped following the Jobs report Friday. The 2-yr popped 11 bps to 1.86% in its biggest one-day move of the year, while the 10-yr closed back above 2%. Most yield curves made positive moves, but the 2-10 did flatten.
  • The Hilliard Lyons View: People working and rates steadying are positive signs for the US economy.

A Look Ahead

  • The Hilliard Lyons View: A few key pieces of economic data will be in focus this week. First, the June FOMC minutes will be available to parse on Wednesday as investors hone in on July’s looming rate decision. Further, inflation data is due out Thursday morning. As mentioned above, the lack of inflation has flustered the Fed and will be key in policy decisions to come. Elsewhere, PepsiCo and Delta Airlines report results this week as earnings season approaches.

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.