Monday, August 5, 2019

Week In Review | August 5 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.

Equities Stumble in News-Heavy Week

  • Global stocks plunged last week. The S&P 500 shed 3.1% following a more-hawkish-than-desired 25 bp rate cut and a (surprise!) Chinese tariff announcement. Emerging markets sold off over 4% despite a relatively flat USD, while bonds and bond proxies (Real Estate, Utilities) provided support. Gold rallied, and the VIX had its largest 5-day spike of the year.
  • The Hilliard Lyons View: Despite a healthy Jobs report and surprisingly resilient earnings, a perceived (rate) hawkish Fed and (tariff) hawkish White House were enough to send US stocks to their worst week of 2019. The market reacted sharply to the tariff announcement, though reports say the Trump Administration is open to delaying or halting the tariffs if China makes significant progress by Sept. 1. The trade war rages on.

The trade war rages on.

Fed Cuts Benchmark Rate

  • The FOMC cut the Federal Funds Rate target by 25 bps Wednesday, its first rate cut in over 10 years. The Fed cited soft business investment, muted inflation, and a weakening global environment as key reasons for the decision. The action received a cold market response following Fed Chair Powell’s press conference, where he implied that the cut was a “mid-cycle adjustment” rather than the start of a longer easing cycle. Futures are pricing in a 100% chance of a second cut at the Fed’s September meeting.
  • The Hilliard Lyons View: Despite the media attention surrounding the Fed’s decision, we remain largely unconvinced that a 25 bp rate cut is enough to materially affect aggregate corporate decision-making. We believe that markets merely wanted to know that the Fed had their back; in this sense the cut was about messaging and confidence. When Powell “faltered” in his messaging, stocks promptly sold off. Still, markets are expecting 1-3 more rate cuts this year, and we believe the shift globally to an even easier-money regime will be supportive of stocks in the near- and medium-term.

Rates Plunge

  • Yields dropped significantly toward the back half of last week. Long bonds (7-, 10-, and 30-year) hit their lowest levels since 2016, and the 2/10 curve flattened.
  • The Hilliard Lyons View: Investors flocked to fixed income Thursday as they sought safe haven from the renewed trade drama. In fact, in a good reminder why diversification is so crucial, Thursday was the Barclays Aggregate’s single best day of 2019.

A Look Ahead

  • The Hilliard Lyons View: Though nearly 80% of the S&P 500 has reported Q2 earnings, several noteworthy companies will deliver results this week; Walt Disney, Uber, HSBC, and CVS report, among others. This week is lighter on economic news following last week’s deluge of info, but investors should pay attention to the ISM Non-Manufacturing PMI data out Tuesday. Finally, with trade rhetoric back in the headlines and driving markets, we will be watching for any indication of retaliation from China (and/or additional protectionism from the US). As of 8:29 ET Monday morning, S&P 500 futures are down 1.5% and the Chinese Yuan is at a new low vs. the US Dollar; Beijing is blaming the tariffs and protectionist threats for the drop.

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.