Monday, September 23, 2019

Week In Review | Sept 23 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 Tumble Slightly

  • Stocks ambled to moderate losses last week, with most of the price action coming after the Fed’s decision to cut rates on Wednesday. Defensive assets led, w/ Utilities, Real Estate, and Fixed Income outperforming. FedEx (FDX), often followed as a global activity proxy, lost 15% last week.
  • The Hilliard Lyons View: As is usual during FOMC meeting weeks, stock activity was muted leading up to the 2:00pm announcement of this cycle's second rate cut. More on the decision below, but with the Fed largely delivering on market expectations, volatility remained in check. In general, we see the market as largely fixated on a single issue: global trade. In keeping with that theme, the market sold off sharply Friday afternoon on the news that a Chinese delegation cancelled a scheduled visit to Montana. Still, optimism on the trade front seems elevated vs. recent memory.

The FOMC cut its target range for the Federal Funds Rate by 25 bps on Wednesday.

Fed Cuts, What’s Next?

  • As mentioned above, the FOMC cut its target range for the Federal Funds Rate by 25 bps on Wednesday. The FOMC noted the strength of the US consumer, but acknowledged muted inflation, global uncertainty, and weakening business investment as reasons for their decision.
  • The Hilliard Lyons View: We see two key takeaways from the widely anticipated rate cut. The first is the growing divide between several voting members of the FOMC, which initially spooked equity markets. While some on the committee believe that US data is strong enough to pause the momentum of easier monetary policy, others likely believe global weakening merits further rate cuts in 2019 & 2020. This divergence is worth watching. Secondly, Powell's press conference was largely drama-free (by design), but he did suggest that should data weaken further, the "mid-cycle adjustment" could evolve into a full-on easing regime.

Rates Stumble

  • Rates tumbled last week as the Barclays Aggregate returned over 1%. The 2yr/10yr curve flattened, while the 3mo/10yr curve crossed the 4-month mark of nearly continuous inversion.
  • The Hilliard Lyons View: The 3mo/10yr first inverted on March 22nd, while the 2yr/10yr first inverted August 27th. The S&P 500 Total Return is up 7.9% and 4.4% from those dates, respectively. 60/40 portfolios are positive over both time frames, as well. We reinforce two key themes - market timing the yield curve does not work, and being properly diversified does.

A Look Ahead

  • The Hilliard Lyons View: A smattering of important macro and micro items this week. On the economic side of things, we examine the US consumer for cracks: both the Conference Board Consumer Confidence and University of Michigan Consumer Confidence data will be posted for September, while Friday delivers personal spending & income figures. In earnings, Nike will report after the bell Tuesday. The company is at the center two major trends: retail’s recent struggles and the Chinese trade & supply chain issues. Nike's results could be a harbinger of what to expect this earnings season.

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.