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, Bloomberg as of January 21, 2020

Chart of the Week:  With the Chinese New Year holiday already in progress and Chinese markets scheduled to close at the end of the week to celebrate, it seemed like an appropriate time to share this tongue-in-cheek zodiac analysis from Bloomberg. 2019 was the Year of the Pig, which is the best performing zodiac year, and the S&P 500 gained almost 29%. Unfortunately, 2020 is the Year of the Rat which is the third worst zodiac year and has averaged a gain of only 3.3% since 1928 (See Chart). Keep in mind that the Year of the Rat’s average returns are skewed lower by the almost -39% loss in 2008. Fundamentally, Avalon is more optimistic than the zodiac indicator with better economic and earnings growth for 2020 along with a trade truce and low yields.

  WEEK IN PREVIEW

  • Geopolitical: The U.S. Senate begins the impeachment trial of President Trump. The World Economic Forum meets in Davos with President Trump speaking on Tuesday. The U.S. markets were closed on Monday for the Martin Luther King Jr. holiday. Markets in China are closed from January 24th through the 30th for the Lunar New Year, the Year of the Rat. The International Monetary Fund released its World Economic Outlook in Davos on Monday and lowered its 2020 global growth forecast slightly to 3.3% but still up from 2.9% in 2019.
  • U.S.: Existing home sales for December should remain solid as the job market remains strong with low mortgage rates. January Markit PMI manufacturing and services are both expected at 52.5 versus 52.4 and 52.8 respectively last month. The Atlanta and NY Fed currently estimate 4Q GDP growth at 1.79% and 1.22% respectively.
  • Q4 Earnings: The earnings season is now in full swing with 58 S&P 500 companies scheduled to report Q4 results, including NFLX, AXP, JNJ, PG, IBM, TXN, INTC, LUV, AAL, UAL. With only 9% of companies reporting, 72% and 63% exceeded earnings and sales estimates respectively. Blended earnings expectations declined to -2.1% year-over-year (Y/Y) and sales improved to 2.7% Y/Y for Q4. The blended earnings estimate, combining actual results with estimates for companies yet to report, deteriorated due to downward revisions in the energy sector outweighing upward revisions in healthcare and industrials.
  • Europe: German PPI for December was reported at -0.2% Y/Y versus -0.7% in November. January German ZEW survey of current situation became less negative at -9.5 from -19.9, and ZEW expectation survey improved to 26.7 from 10.7. The January Eurozone Markit manufacturing and services PMIs are expected to improve to 44.5 and 53.0. The U.K. Markit manufacturing and services PMIs should improve to 48.7 and 51.0. The European Central Bank (ECB) meets and is widely expected to leave policy unchanged but the market will look for hints about the future policy framework under President Lagarde. The U.K. Parliament is expected to approve PM Johnson’s Brexit bill to depart the European Union by the January 31 deadline.
  • Asia: Japan releases December trade data along with consumer inflation. Japan PMI data for January will also provide a measure of economic activity. The Bank of Japan (BOJ) meets with no change in policy expected but the 2020 economic outlook might be increased. China’s economic calendar is empty of any important releases.
  • Central Banks: In addition to the ECB and BOJ, the central banks of Canada, Malaysia, Norway, Indonesia and Nigeria meet with no changes in monetary policy rates anticipated.

  WEEK IN REVIEW

  • The S&P 500 recorded another new high and moved 2% higher during the week as trade and geopolitical concerns abated. Utilities +3.8%, information technology +3.0% and materials +2.7% outperformed the S&P 500, while energy -1.1%, consumer discretionary +1.1% and financials +1.1% were the biggest laggards. WTI -0.8% and Brent -0.2% crude oil prices were down for the week, impacting the energy sector -1.1% and MLPs +1.4%. Small cap stocks outperformed the S&P 500 with the Russell 2000 up 2.5%. The 10-year U.S. Treasury yield stayed put at 1.82%. High yield credit spreads narrowed, reflecting increased risk appetite.
  • The U.S. dollar was stronger against both developed and emerging market currencies. Developed international stocks as measured by MSCI EAFE underperformed the S&P 500 returns in both U.S. dollar terms +0.9% and on a hedged-currency basis +1.1%. Emerging market stocks underperformed the S&P 500 with the non-hedged return of +1.2% for MSCI EM.
  • The 10-2 yield curve steepened to +26 basis points. Another curve measure of three-month yield six quarters forward – three-month yield flattened to +3 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 well 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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Quarterly and Monthly Notes

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2019

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2019

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Third Quarter, 2018

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Second Quarter, 2018

Monthly Note

May 2018

Monthly Note

April 2018

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First Quarter,  2018

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February 2018

Yearly Outlook

2018

Monthly Note

November 2017

Quarterly Note

Third Quarter,  2017

Monthly Note

August 2017

Monthly Note

July 2017

Quarterly Note

Second Quarter,  2017

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May 2017

Monthly Note

April 2017

Quarterly Note

First Quarter, 2017

Monthly Note

February 2017

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January 2017

News | Press

Avalon Advisors, LLC Announces new Co-Chief Investment Officer

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