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.
Small Caps, Cyclicals Lead Rally
- US stocks rallied for a third straight week on the back of positive trade momentum and better-than-expected economic data. US small caps posted their best week of 2019, while cyclicals (Financials, Energy) outperformed. Risk-on sentiment sent rates skyrocketing; the Barclays Aggregate posted its worst 5-day stretch since 2016.
- The Hilliard Lyons View: The rally in value & cyclicals was the story of the week as markets turned optimistic. We suspect positive trade headlines out of both China & the US drove the moves, but stimulus from the ECB & surprisingly strong US economic data added fuel to the flames. On the calendar week, Value outperformed Growth by the most in over a decade.
On the calendar week, Value outperformed Growth by the most in over a decade.
**Weekend Geopolitical Update**
- Brent oil futures posted their largest intraday jump following Saturday’s strike on a Saudi oil facility. The production shutdown will amount to a loss of just under 6 million barrels/day, roughly 5% of daily crude production.
- The Hilliard Lyons View: While oil prices are prone to short-term supply shocks, Saudi production capacity should be back to normal within the next week. Still, increasing tensions in the region could keep the price above its recent range, which may push up inflation and hurt the US consumer in the near term. We will be monitoring this situation closely as it develops.
European Central Bank Announces Stimulus
- The ECB announced a stimulus package in an effort to curb the persistently low inflation in the region. The Bank cut rates deeper into negative territory and restarted its QE program after less than a year on the shelf.
- The Hilliard Lyons View: As the ECB (and BOJ) extend their easy monetary policy, the US Federal Reserve faces a difficult challenge. Even with the Fed projected to cut rates 1-2 more times in 2019, US interest rates will remain among the highest in the developed world. Some would argue that in a globalized economy, this renders the Fed’s policy overly tight and, to the chagrin of US multinationals, strengthens the US dollar.
Rates Shoot Up
- The 10-yr Treasury was up 34 bps, its biggest 5-day jump in nearly 3 years, while the yield curve increased its positive spread.
- The Hilliard Lyons View: The risk-on behavior hit bonds hard last week, but higher rates and wider yield spreads look to be a positive indicator for risk assets and the US economy on the whole.
A Look Ahead
- The Hilliard Lyons View: All eyes will be on the FOMC this week as the Fed convenes for their September meeting. Futures are pricing in a 77% chance of a 25bp rate cut, down significantly from the 100% chance of 1-2 cuts being forecast last month. Geopolitics will be on the forefront following the strike on Saudi oil facilities, further increasing tensions in the Middle East.
- 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.