Monday, July 22, 2019

Week In Review | July 22 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.

US Stocks Tumble

  • US stocks fell last week, while International and Fixed Income provided support. Energy (oil) and Comm. Services (Netflix) lagged significantly. Gold continued its ascent, hitting a new, 6-year high Friday on geopolitical worries, falling yields, and dovish central banks, among other items.
  • The Hilliard Lyons View: Despite a down week, earnings season has been fairly positive thus far. With ~80 S&P 500 companies reporting, 79% have reported a positive earnings surprise, pulling the expected Q2 earnings decline up to just -1.9% (per Factset). Meanwhile, stocks rallied Thursday following a speech in which NY Fed Gov. Williams outwardly advocated for “swift action” and “preventative measures” regarding FOMC policy. The market interpreted the speech as particularly dovish, boosting equities and briefly causing the probability of a 50 bp rate cut in July to shoot to 60%.

Energy (oil) and Comm. Services (Netflix) lagged significantly.

Iran Tensions Flare

  • Geopolitical tensions in Iran continue to ratchet up. Last week alone, Iran contradicted the Trump Administration regarding a (possibly) downed Iranian military drone and seized a British oil tanker at the Strait of Hormuz. Oil prices rose Friday on the news.
  • The Hilliard Lyons View: Though both the US and Iran publicly insist they do not want a conflict, the recent encounters insinuate that more significant action could be ahead. Just this morning, Iranian officials are claiming they’ve captured 17 alleged CIA spies. Tensions in the Middle East are nothing new, but with no obvious near-term path to a diplomatic solution, we expect market volatility to remain elevated and oil prices to see a boost.

Bonds Pop, Curves Mixed

  • Yields fell last week as investors sought out safe havens in the face of geopolitical turmoil and mixed earnings results.
  • The Hilliard Lyons View: The 3-mo/10-yr treasury spread, which first inverted nearly four months ago, has flattened precipitously since the Fed’s more dovish turn and stood at just 2 bps Friday. Relatedly, we submit that an increasing amount of negative yielding debt abroad could drag US yields down as foreign investors seek guaranteed income and/or relative safety.

A Look Ahead

  • The Hilliard Lyons View: Earnings season will be hitting its stride this week, with a cavalcade of S&P 500 companies delivering results. Mega-cap Tech names Amazon, Facebook, Alphabet, Intel, Visa, and Paypal should headline, but Coca-Cola, Texas Instruments, Lockheed Martin, AT&T, Boeing, UPS, Caterpillar, Anheuseur-Busch, Starbucks, 3M, and McDonalds also report, among others. Adding to a packed week, the US will report initial Q2 GDP on Friday morning. Consensus is just under 2.0%, while the Atlanta Fed GDPNow is projecting 1.6% growth. Talks with China will continue following a (productive?) phone call last week, while stateside the House of Representatives will be rushing to finalize a spending deal before recess begins Friday.

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.