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.
Equity Roller Coaster
- Stocks finished lower last week amid considerable volatility. The S&P 500 shed 0.4% after being down more than 3% earlier in the week. Small caps and international issues fared even worse despite a mostly weaker dollar. Sector returns were mixed; REITs and Utilities fared best.
- The Hilliard Lyons View: There was a lot going on last week, from trade salvos to earnings reports, but from our perspective the real visceral fear working through global markets was about global growth (i.e., possible recession). This compelled a rally in bonds, which seemed to weigh on investors’ appetite for equities and the demand outlook for oil. Meanwhile gold caught a bid as yields on other assets evaporated, breaking the $1500/ounce level for the first time since 2013. Growth fears seemed to overwhelm recent points of optimism like better-than-expected earnings, continued jobs growth and easier Fed policy.
The US labeled China a currency manipulator.
The Trade War Gets Trickier
- The United States designated China a ‘currency manipulator’ last week. This came just hours after the yuan-dollar exchange rate broke 7-to-1 for the first time since 2008. Elsewhere, the Chinese government continues to blame Western influence for riots in Hong Kong.
- The Hilliard Lyons View: It is important to note that when the yuan-dollar rate goes ‘up,’ like from 5 to 6 to over 7, this indicates a stronger dollar and a weaker yuan. A weaker yuan is seen as a way to combat tariffs. We are unsure what the ‘manipulator’ mantle actually accomplishes, and the same goes for blaming the Americans for issues in Hong Kong. We are, however, comfortable asserting that heightened rhetoric complicates the trade negotiation process.
Rates Fall Further
- Yields dropped significantly last week, but like risk assets, finished above their intraweek lows. Futures are pricing in a 100% chance that the Fed cuts its target rate again when they meet in late September.
- The Hilliard Lyons View: Lower rates make it cheaper and easier for companies to gain credit, but at a certain point, lower rates for longer-term bonds are a negative signal for growth. We believe this latter scenario is where most markets are right now, and we expect stocks to key off of rate moves near-term, at least until rates seem to stabilize.
A Look Ahead
- The Hilliard Lyons View: Earnings season continues to taper off this week, but a handful of high profile companies are expected to release results. The list includes: Macy’s, Cisco Systems, Walmart, Nvidia and Deere & Co. With a strong US consumer being the foundation of our positive bias toward US economic fundamentals, we look forward to Retail Sales data for July due out Thursday. Other noteworthy economic data include Industrial Production (Thursday) and Housing Starts (Friday). Most important to markets however, may remain geopolitical headlines; riots this weekend in Hong Kong shut down the airport.
- 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.
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.