Monday, December 17, 2018

Week In Review | Dec 17 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.

Friday Swoon Shapes Week for Stocks

  • A weak Friday for stocks pushed equities indexes into negative territory for the week. The S&P 500 fell over 1%, which lagged international markets despite a USD that gained nearly 1%. Utilities were the best sector for a second consecutive week. Treasury yields rose, but bonds eked out a slight gain on a total return basis.
  • The Hilliard Lyons View: Investor psyches are fragile, in our view. A news report Friday that J&J may have known about asbestos in talc products weighed on Healthcare, which had been a leadership group. Weak Chinese data seemed more impactful than positive trade news. We suspect technical levels are influencing some trading, and may continue to do so over the next couple of weeks as traders gauge year-end.

International stocks have outperformed the S&P 500 in four of the past five weeks.

Drama Continues on the World Stage

  • Theresa May survived a no confidence vote on her leadership, but delayed a vote on her Brexit agreement. China may be removing auto tariffs from US cars, and in-person negotiations are expected to resume after January 1. The ‘Yellow Vest’ protests continued in France despite concessions from President Macron, including nixing a gas tax hike.
  • The Hilliard Lyons View: News flow was particularly heavy for a second week, but we are not sure much changes for investors. International indexes have outperformed the S&P 500 in four of the past five weeks, underscoring the need to remain diversified despite global tensions.

Yields Stabilize

  • Treasury rates stabilized last week. The spread between 2-yr and 10-yr Treasuries rose slightly to 16 basis points (0.16%), and remains positive.
  • The Hilliard Lyons View: Rates had been steadily declining since early October, and we believe stabilization was incrementally positive for equities last week. We expect the Federal Reserve to raise its Fed Funds target by 0.25% this week.

A Look Ahead

  • The Hilliard Lyons View: The Fed rate decision on Wednesday at 2pm ET may be the most noteworthy market event this week. An average week for economic data contains a revision to Q3’18 GDP (Friday) and refresh of the Leading Economic Index (Thursday). More so than over the last few weeks, we believe earnings reports could impact markets as 14 S&P 500 companies report (up from two last week). The mixed bag includes CarMax, Nike, Walgreens, Carnival Cruise, FedEx, Micron, and Oracle. Ten trading days remain in 2018, and we expect equities to remain volatile. Year-end positioning can be important to some institutions, meaning it is not always fundamentals that matter over the last few sessions of the year.

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.