Tuesday, September 3, 2019

Week In Review | Sept 3 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.

Stocks Surge on Trade Optimism

  • Global stocks surged last week, capping a volatile August (and the second worst month of 2019). Cyclicals led as the market bid up risk assets; Financials finished 3.2% higher despite interest rates’ continued descent. Gold & oil moderated, while the US Dollar Index (DXY) hit a 2-yr high.
  • The Hilliard Lyons View: With the trade war continuing to lead headlines, equities got a boost last week when Chinese officials suggested talks with the US would continue. Despite recent tariff hikes, the S&P 500 ran with the optimism to its best week since June. As we’ve noted, in lieu of hard data, markets can get whipsawed by softer items (e.g., speeches, tweets). This was surely the case last week, though they did whipsaw favorably.

Global stocks surged last week, capping a volatile August.

Consumer Data Diverges

  • 2Q GDP was revised downward to 2.0% Thursday, with few notable component revisions. Elsewhere, two consumer-oriented indices diverged, as the Conference Board Consumer Confidence Index moved sideways (beating estimates) while UofM Consumer Sentiment dropped the most since 2012.
  • The Hilliard Lyons View: Though consumer survey data can be noisy, it is worth monitoring closely due to the importance of the US consumer to growth (especially as business investment slows). As measured by PCE, households ramped up spending in July, a good sign that the UofM survey data may be overly reactive to recent trade pessimism.

Brexit Cometh

  • British PM Boris Johnson acted to suspend Parliament until 10/14 last Wednesday, in a move aimed at preventing MPs from blocking his preferred no-deal Brexit ahead of the 10/31 deadline. MPs largely oppose a no-deal Brexit due to the potentially chaotic and harmful economic consequences.
  • The Hilliard Lyons View: Johnson’s maneuver sparked a minor crisis in the UK despite its legality, and moved the country further toward a no-deal exit from the EU. Financial experts and government bodies have forecast that such an exit would cause significant damage to GDP and the British pound, with a recession likely imminent. The shock to trade would also likely further damage struggling Eurozone economies.

Yield Curve Inverts; Rates Fluctuate

  • The 2/10 curve spent much of the week shallowly inverted, with the two benchmark yields closing Friday just 1bp apart.
  • The Hilliard Lyons View: While the 2/10 curve initially inverted on August 12th, last week was the first occasion of multiple inverted days in a row. While the S&P 500 sold off ~3% on the initial date of 2/10 inversion, it has since recovered the losses.

A Look Ahead

  • The Hilliard Lyons View: Economic data highlights the week. ISM Manufacturing and Non-Manufacturing PMI numbers are due, while the August jobs report drops Friday. Fed Chair Powell will speak in Zurich Friday; Fed speeches have proven market-moving events recently. Finally, Hurricane Dorian is expected to hit the US coast shortly. Our thoughts to those affected by the storm.

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.