Monday, December 31, 2018

Week In Review | Dec 31 2018

Ross Mayfield, CFA
Author position
Correspondent Research 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 Rally in Wild Week

  • After a dreadful Christmas Eve trading session, the S&P 500 rallied strongly to finish the week, including the best single day of performance in nearly a decade on the 26th. Junk bond spreads have widened over 200 bps in the last 3 months as oil continues its slide, now down over 40% from its Oct. peak. The CBOE Volatility Index (VIX) hit a 10-mo high.
  • The Hilliard Lyons View: Volatility has returned to markets with gusto. Of the nine trading sessions in 2018 featuring a move of 2.5% or more, two occurred during last week’s shortened schedule. Thursday was especially noteworthy, as the Dow rallied over 800 points in the last 90 minutes of trading. That said, enduring market volatility is the price investors must pay for higher long-term returns. The true risk in the stock market is letting this short-term volatility influence your long-term financial plan.

… enduring market volatility is the price investors must pay for higher long-term returns.

US Consumer in Focus

  • The Conference Board Consumer Confidence Index fell sharply in December, declining from 136.4 to 128.1. This comes on the heels of a small dip in November. On the flip side, holiday shopping bolstered strong end-of-year retail sales figures, especially via online merchants.
  • The Hilliard Lyons View: Given that the consumer accounts for ~70% of US GDP, we give merit to any potential changes in behavior. While the consumer confidence numbers can be noisy month-to-month, any sustained dip may represent a more hesitant and/or tight-pursed consumer. Though a dent in confidence might be expected given recent stock market volatility, a continuation of this trend could be a noteworthy drag on the US economy heading into 2019. Regardless, as of now, the consumer still looks healthy: wages are up, unemployment is at 50-year lows, savings rates are robust, and gasoline is cheap, among other items.

Bonds Pop, Yield Curve Steepens

  • Treasury yields across the spectrum declined last week despite the rally in stocks; the 2/10 yield spread widened to 20 bps.
  • The Hilliard Lyons View: The 2-yr Treasury yield hit a six-month low Friday, down ~13% from November highs. Could the bond market be signaling that it believes the pace of rate hikes will slow or even halt in 2019?

A Look Ahead

  • The Hilliard Lyons View: Markets will be closed Tuesday for New Years Day, though Monday is a full session. It is another light week for earnings and economic data so we will be closely watching the partial government shutdown, expected to become the second longest of this decade. With a major debt ceiling showdown coming in 2019, one could reasonably assume the political maneuverings from the current shutdown will repeat next summer, when the stakes will be much higher.

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.