Monday, August 19, 2019

Week In Review | August 19 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 Volatile Week

  • Global stocks finished lower in another roller coaster week, as the inversion of the 2/10 yield curve weighed on sentiment. The S&P 500 lost -0.94%, but rallied toward the back half of the week after its second worst day of 2019 on Wednesday. Bonds & defensive sectors (Staples, Utilities, REITs) led, while gold hit another 6-year high as investors sought safety.
  • The Hilliard Lyons View: Volatility has returned to markets in a significant way. The VIX closed above 21 three separate times last week, hitting said marker for just the 2nd, 3rd, and 4th times since early January. Much of the week’s rhetoric surrounded the 2/10 yield curve inversion (more below) and the resulting fear of a looming recession. Global economic data is generally weakening despite easier monetary policy across the board.

The 2/10 curve briefly inverted Wednesday, prompting renewed fears of an impending recession

Retail Strength

  • Retail sales beat expectations in July, surging 0.7% vs. 0.3% expected. Sales at online retailers rose 2.8%, bolstered by Amazon Prime Day and related events. Elsewhere, Wal-Mart (WMT) beat expectations and raised full-year guidance despite trade-war pressure and global weakness.
  • The Hilliard Lyons View: Despite geopolitical and economic turmoil around seemingly every corner, the US consumer continues to thrive. Our base case for a perhaps stronger-than-expected US economy remains rooted in the health of the consumer. While consumer confidence and expectations moderated in July, we view this hard sales data as affirmation that there is fuel in the engine for the US economy to grind higher in the near-term.

Rates Plummet, Curves Briefly Invert

  • The 2/10 curve briefly inverted Wednesday, prompting renewed fears of an impending recession. An inversion has preceded the last five recessions, though the lead time is varied and significant. Rates across the board fell precipitously last week; the 30-year Treasury dipped below 2% for the first time. As of writing, the 1-mo. is the highest yielding government bond.
  • The Hilliard Lyons View: While each of the five recessions since 1976 have been preceded by a 2/10 inversion, there have been false positives, as well. As we noted in our commentary earlier this year using a weather analogy: Just because it is cloudy (the curve inverts), it doesn’t have to rain (a recession). Ultimately, yield curve inversions can be instructive about economic conditions, but simply put, they are a bad tool for timing the economy and (especially) the stock market.

A Look Ahead

  • The Hilliard Lyons View: In keeping with our retail theme from above, a slate of consumer-oriented firms will deliver earnings results this week. Home Depot (HD), Lowe’s (LOW), Target (TGT), and TJX Companies (TJX) all report. In economic releases, all eyes will be on the FOMC minutes released Wednesday. Markets are pricing in a better-than-fifty percent chance of three additional rate cuts this year, and the Fed’s language from its July meeting could provide clues to that end. Key housing and manufacturing data will become available, as well.

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.