Monday, November 26, 2018

Week In Review | Nov 26 2018

Spencer Joyce, CFA
Author position
Vice President | Markets Analyst

Hilliard Lyons’ Investment Strategy & Research team is dedicated to supporting you and your Wealth Advisor. We provide investment guidance and help you separate meaningful news from idle noise via timely market commentary.

Thanksgiving Week Sees Lower Stocks

  • Stocks were lower last week. The S&P 500 fell nearly 4%. US small-caps fared better, as did both developed and emerging international markets. US Treasuries were little changed and bonds offered some relief from equity volatility. Technology was the weakest sector last week, followed by Energy; Utilities and Real Estate were somewhat resilient.
  • The Hilliard Lyons View: Trading is often erratic around the Thanksgiving holiday. Market participation is low on Wednesday (a major travel day), and Black Friday is just a half-day session in the United States. We believe fears tied to the sustainability of global economic growth were the most prescient driver of stocks last week. Several retailers, including Best Buy, Kohl’s and Lowe’s, beat earnings expectations, but the news did not have much of an effect on sentiment.

Trading is often erratic around the Thanksgiving holiday.

Chart in Oil Looks Slippery

  • Benchmark oil prices fell over 10% last week. WTI, the key price for US crude, ended the week at $50 after being above $75 in early October.
  • The Hilliard Lyons View: Record US production, dollar strength, and waivers allowing Iranian imports are destructive for prices. Speculative bets against global growth are likely weighing on the commodity as well. The magnitude of recent volatility is sub-optimal, but lower prices are good for US consumers and help tamp down inflation.

Yields Steady

  • Amongst bonds, Treasuries in particular proved an effective equity hedge last week. The spread between 2-yr and 10-yr Treasuries slipped a few basis points to 0.23%, and sits toward the low end of its recent range.
  • The Hilliard Lyons View: The key 2/10 spread remains positive (10-yr yield > 2-yr), which we view as constructive. We expect the Fed to hike rates in December, but continued volatility could compel ‘pauses’ in the hiking cycle in 2019.

A Look Ahead

  • The Hilliard Lyons View: President Trump and Chinese President Xi Jinping meet late this week in Argentina, with Trade on the agenda. The event could set the tone for the next few months in financial markets, particularly if there are definitive outcomes. One item that would likely bode well would be a delay in raising 10% tariffs to 25% tariffs (set for Jan. 1). Seven S&P 500 companies will report earnings next week (e.g., Tiffany & Co., JM Smucker’s), although we expect broad strokes commentary on the early-holiday shopping season to be more impactful to markets. The economic calendar is modest, with a revision to Q3’18 GDP on Wednesday perhaps the most interesting release.

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 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. Diversi-fication and asset allocation do not guarantee a profit or guarantee against a loss.

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.