Tuesday, August 7, 2018

Week In Review | Aug 6, 2018

Mark K. Nickel, CFP, CIO
Author position
Chief Investment Officer
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.

Strong GDP Amid Flurry of Economic Data

Gross Domestic Product (GDP) came in at 4.1% for Q2’18, the strongest number since Q3’14. Consumer spending and net exports led the way, offsetting unusually low inventory numbers. Inflation was slightly up, but remains muted overall. The US added 157,000 jobs in July, at the lower end of consensus, though unemployment did decrease from 4.0% to 3.9%. Manufacturing data was softer than expected, but still firmly in expansion territory. Finally, the FOMC left rates unchanged.

Source: Bloomberg
  • The Hilliard Lyons View: We view the week’s economic news as largely positive. The GDP print reveals a growing economy, likely boosted by recent tax cuts. However, with inflation under control, we don’t see much risk in the way of unexpected rate hikes from the Fed. We believe further gradual increases in the fed funds rate will be in line with a strong economy, healthy labor-market, and inflation within the target range.

GDP came in at 4.1% for Q2’18, the strongest number since Q3’14

Earnings Season Wrapping Up

We are approaching the end of an especially constructive Q2’18 earnings season. With over 80% of S&P 500 firms reporting, Y/Y earnings growth is ~24% led by Energy, Materials, and Technology, though numbers were strong across the board. Nearly 80% of firms surprised to the upside. Guidance has largely been positive, though headwinds in the form of a strong USD and tariff concerns have been noted somewhat consistently.

  • The Hilliard Lyons View: US stocks resumed their outperformance last week, an outcome we believe was largely driven by Q2 results. While continued trade tensions and international worries have somewhat muted a positive US earnings story, we are encouraged by these results, and continue to believe in focusing on fundamentals over headlines.

Global Bonds Yield Perk Up

Japanese & Eurozone yields moved off recent lows following rumors of BOJ policy tweaks and a minor selloff in global bonds.

  • The Hilliard Lyons View: We believe global QE has acted as an anchoring factor for US rates, and are interested to see the reaction domestically as QE programs wrap up. A weakening USD and steeper curve are possible as capital exits US debt.

A Look Ahead

  • The Hilliard Lyons View: Though a comprehensive view of Q2 earnings has largely materialized, there are a few key names yet to report; Disney, Booking, CVS, and Twenty-First Century Fox highlight next week’s earnings. More inflation data is out Friday in what’s a light week for economic news; in the meantime, ISR will be trying to stay cool in the summer heat.

Key Definitions

  • S&P 500 – index comprised of ~500 large-cap US equities listed on the NYSE or NASDAQ.
  • Russell 2000 Index – index comprised of ~2000 small-cap US companies.
  • MSCI EAFE – index comprised 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 comprised 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 comprised 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. Diversification 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.