Monday, December 24, 2018

Week In Review | Dec 24 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.

Stocks on Sale Ahead of Christmas

  • Stocks around the globe fell last week, though the most acute weakness was unique to US markets. The S&P 500 fell 7%, making it the worst week for that index since August 2011. International stocks were more resilient, and have now outperformed in five of the past six weeks. Treasury yields slipped, as high quality bonds posted a modest gain.
  • The Hilliard Lyons View: Comments from the Fed that suggested monetary policy could be tighter in 2019 than markets had hoped for seemed to exacerbate selling in stocks. The upside to getting through weeks like last week however, is that they simply do not happen often. Calling short-term swings in the market is a fool’s errand, but history might suggest some of the most acute pain is behind us.

All 14 S&P 500 companies that reported results last week beat profit expectations.

US Government Shutdown; US Companies Open for Business

  • All 14 S&P 500 companies that reported results last week beat consensus profit expectations. This list includes companies ranging from Nike to FedEx, and Oracle to Carnival Cruise. Pockets of the government shut down again Friday, as Democrats and Republicans squabble over border wall funding.
  • The Hilliard Lyons View: We highlight this divergence to emphasize our view that much of what goes on in the real economy is divergent from the rhetoric in D.C. or the news on television. Government shutdowns are negative for the economy, but not in a linear fashion (i.e., effects intensify the longer they go). We note that the current freeze impacts fewer departments than prior shutdowns due to selective pre-funding.

Fed Rate Hike

  • The Federal Reserve hiked its Fed Funds target rate for the ninth time this cycle, to a range of 2.25%-2.50% last week. On a bid for safety, rates fell across most of the curve. The spread between 2-yr and 10-yr Treasuries fell one basis point to 15 bps (0.15%).
  • The Hilliard Lyons View: The rate hike was expected. The surprise was Fed guidance for two hikes in 2019, whereas the market is pricing in one or none. That said, prior guidance had been for three hikes, so the Fed seems to be listening to markets somewhat.

A Look Ahead

  • The Hilliard Lyons View: Markets will be closed on Tuesday for Christmas, and Monday is an abbreviated session. We dissuade investors from reading too much into moves in markets this week, as holiday weeks are often characterized by light volume and sporadic news flow. No S&P 500 companies report earnings this week, in what is also a light week for economic data. An end to the shutdown would be a nice gift for investors, but we view progress as unlikely before the New 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.