Perspectives & Commentary

Avalon produces a variety of investment commentaries.

Our perspectives and quarterly commentary are issued throughout the year and cover a range of investment-related topics.

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Source: Avalon Investment & Advisory, FactSet as of January 13, 2020

Chart of the Week:  4Q 2019 earnings season begins prime time this week with 24 S&P 500 companies scheduled to report. This week is heavy on earnings from the financial sector, which is forecast to report 7.3% earnings growth for the quarter. Overall, S&P 500 earnings for the quarter are now expected to decline -2.0% year-over-year (Y/Y) which is a deterioration since the consensus estimates at the end of 2019 while sales are forecast to rise 2.6% (See Chart). Avalon expects another quarter with companies beating expectations bringing earnings into the positive for the quarter. While specific earnings reports are likely to impact an individual company, the overall market is more likely to be focused on future expectations. The consensus expects earnings growth to return in 2020 with 1Q expected to grow at 4.9% and the year at 9.5%. Since analysts are typically overly optimistic to start the year, Avalon expects 5% -7% earnings growth for the S&P 500 in 2020.

  WEEK IN PREVIEW

  • Geopolitical: U.S. and China are scheduled to sign the first phase of the trade deal. Markets will be interested in the details of the Phase One deal and will monitor the progress of the second phase which will be more challenging. The European Union’s new trade commissioner, Phil Hogan, visits the U.S. regarding trade disputes. House Speaker Pelosi is expected to send the articles of impeachment to the Senate with the Senate trial then beginning this week. U.S./Iran tensions have seemingly de-escalated but the situation remains in focus.
  • U.S.: Consumer inflation December should tick up to 2.4% Y/Y. December housing data is expected to remain solid with housing starts growing 1.1% and building permits declining -1.5% month-over-month (M/M). December retail sales should accelerate to 0.3% M/M with the consumer and employment remaining robust. The Atlanta and NY Fed currently estimate 4Q GDP growth at 2.27% and 1.11% respectively. Plenty of Fedspeak on tap with at least seven speeches by Federal Reserve (Fed) members and the release of the Beige Book, but the song will remain the same as the Fed is on hold for the foreseeable future.
  • Europe: Eurozone industrial production for November should improve to -1.0% Y/Y. The U.K. December retail sales expected to improve to 2.7% Y/Y from the previous 1.0%. The U.K. manufacturing and industrial production readings for November fell -1.7% and -1.2% and remain negative Y/Y. The U.K.’s House of Lords expected to approve PM Johnson’s Brexit bill to depart the European Union by the January 31 deadline.
  • Asia: Japan November core machine orders expected to improve to 3.0% from -6.0% M/M. China releases December trade data with exports and imports expected to improve to 2.5% and 9.6% Y/Y, respectively. December China data released included loans, retail sales, money supply, industrial production and GDP for 4Q which should grow at 6.0% Y/Y.
  • Central Banks: The central banks of Turkey, South Africa, Egypt and South Korea are scheduled to meet with Turkey and Egypt expected to cut monetary policy rates.

  WEEK IN REVIEW

  • The S&P 500 gained +0.9% and reached another all-time high during the week as trade and geopolitical tensions subsided. Information technology +2.2%, communication services +2.0% and healthcare +1.5% outperformed the S&P 500, while energy -1.1%, materials -0.3% and financials  -0.2% were the biggest laggards. WTI -6.4% and Brent -5.3% crude oil prices were down for the week, impacting the energy sector -1.1% and MLPs +0.4%. Small cap stocks underperformed the S&P 500 with the Russell 2000 down -0.2%. The 10-year U.S. Treasury yield climbed to 1.82%. High yield credit spreads narrowed, reflecting increased risk appetite.
  • The U.S. dollar was stronger against developed but weaker against emerging market currencies. Developed international stocks as measured by MSCI EAFE underperformed the S&P 500 returns in both U.S. dollar terms -0.1% and on a hedged-currency basis +0.5%. Emerging market stocks paced the S&P 500 with the non-hedged return of +0.9% for MSCI EM.
  • The 10-2 yield curve flattened to +25 basis points. Another curve measure of three-month yield six quarters forward – three-month yield widened to +8 basis points. The yield curve has historically provided an accurate forecast of future recessions when the difference in these measures turns negative, also known as inversion. Yield curves are one of the major indicators that we monitor to judge recession risk, but these inversions typically happen more than a year in advance of an economic recession. In addition, stocks have historically had significant advances post-inversion. The three-month yield six quarters forward yield is now reflecting that the market expects very little net moves in short-term rates over the next year and a half. Our view remains that the Federal Reserve is likely on hold for 2020 and the odds of a recession over the next twelve months remain below 50%. Avalon continues to monitor the data closely. Please see our Avalon Perspectives publication, The Yield Curve and Equity Returns, from April 26, 2018, for more details.

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Phan Phan Duong, Senior Analyst

 

Henry J. Lartigue, CFA, Managing Partner

 

Samuel E. Rines, Chief Economist

 

Bill Stone, CFA, CMT, Chief Investment Officer

This report is furnished for the use of Avalon Investment & Advisory and its clients and does not constitute the provision of investment or economic advice to any person, nor the recommendation of any security. Persons reading this report should consult with their investment advisor regarding the appropriateness of investing in any securities or adopting any investment strategies discussed or recommended in this report. Statements regarding future prospects may not be realized. The information contained in this report was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy, timeliness, or completeness by Avalon Investment & Advisory. The information contained in this report and the opinions expressed herein are subject to change without notice. Past performance is no guarantee of future results. Neither the information in this report nor any opinion expressed herein constitutes an offer to buy or sell, nor a recommendation to buy or sell, any security or financial instrument. Avalon Investment & Advisory does not provide legal, tax, or accounting advice. ©2020 Avalon Investment & Advisory. All rights reserved.

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Third Quarter, 2018

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2018

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Second Quarter,  2017

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News | Press

Avalon Advisors, LLC Announces new Co-Chief Investment Officer

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