Monday, August 26, 2019

Week In Review | August 26 2019

Spencer Joyce, CFA
Author position
Vice President | Markets 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.

Volatility Persists

  • US stocks declined for a fourth straight week, though international markets rallied. It was the first week that global issues advanced despite lower US markets since mid-April. The S&P 500 shed 1.4% with all of the decline attributable to Friday’s trading session. Bonds were fractionally higher, while Consumer Discretionary and Utilities stocks were leaders; oil was flattish.
  • The Hilliard Lyons View: Volatility can be chaotic and confusing, but what happened in markets last week actually makes a lot of sense to us. Where meaningful news and data were sparse, markets were whipsawed by trade rhetoric and Fed speak; a string of strong retail earnings reports supported Discretionary stocks. Dovish comments from Chairman Powell at the annual Federal Reserve retreat in Jackson Hole contrasted somewhat with a more hawkish tone from several lieutenants. Some resiliency for oil prices last week was slightly encouraging, as were tighter credit spreads.

Strong retail earnings supported Discretionary stocks.

Retail Roundup

  • The stocks of Home Depot, Lowe’s, Target and TJX Companies all gained last week after reporting Q2 results. Others did not fare so well, including L Brands (Victoria’s Secret), Foot Locker and Kohl’s. Despite divergent stock performance, 8 of 9 S&P 500 retail reporters beat EPS expectations.
  • The Hilliard Lyons View: Reports last week corroborate Walmart’s earlier release and a strong Retail Sales macro data point from July. Last week also supports much of what we believe about retail, such as: size and scale are important, hardlines are a somewhat insulated group, and long-term viability of a business or brand is more important than current profits. A fine quarter for retailers from an aggregate sales perspective also flows in agreement with our view that the US consumer remains healthy.

Yield Curve Still in Focus

  • The 2/10 curve continued to hover around flat; technically the spread ended last week at +0.01%. The yield premium over Treasuries for both investment grade and high yield bonds fell last week.
  • The Hilliard Lyons View: Both ‘low’ rates and a flat/inverted yield curve hold (net) negative indications for the economy and future growth; however, we are more focused on our view that the metric is a poor tool for timing markets. The compression in corporate spreads last week was a major positive surprise given the shivers that rippled through risk assets on Friday.

A Look Ahead

  • The Hilliard Lyons View: Second quarter GDP data is set to be revised on Thursday and highlights a busier week of economic news. Consumer confidence data on Tuesday should be interesting as we continue to track the stream of retail earnings, which includes Tiffany & Co., Dollar General and Best Buy. The group also includes consumer brands Brown-Forman, Smucker’s and Campbell’s Soup, as 13 S&P 500 companies in total are expected to release results. We remind investors that this week precedes the Labor Day holiday; markets will be open Monday - Friday, but participation could be light later in the week.

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.