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, Strategas, Bloomberg as of January 27, 2020

Chart of the Week:  The recent outbreak of a pneumonia-like condition caused by a coronavirus (2019-nCoV) in China weighed on the markets last week. The outbreak of Severe Acute Respiratory Syndrome (SARS) in 2003 can provide some context in terms of possible market reaction (see chart). Regarding SARS, the S&P 500 and U.S. economic activity were already in a downtrend in the wake of the tech bubble when the outbreak began. Similarly, the current 2019-nCoV outbreak should impact stocks on the margin but is not likely to be the determiner of the trend. Economic activity in China will be impacted negatively with services relating to travel the most severely impacted during the busy Lunar New Year holiday. Of positive note, the impacted economic activity should rebound quickly as seen following the SARS episode.

  WEEK IN PREVIEW

  • Geopolitical: The U.S. Senate impeachment trial of President Trump continues with the possible inclusion of witnesses. Markets in China are closed until the 30th for the Lunar New Year, the Year of the Rat. The U.K. officially exits the European Union on January 31. Developments regarding the further spread of the 2019-nCoV coronavirus will be monitored.
  • U.S.: New and pending home sales for December are expected to improve with new sales reaching a new post-housing bubble high. December durable goods orders should rebound from the decline in November. Q4 GDP growth expected at 2.1%. The Federal Reserve (Fed) meets with no changes in policy anticipated and on hold for the foreseeable future. The Atlanta and NY Fed currently estimate 4Q GDP growth at 1.79% and 1.22% respectively.
  • Q4 S&P 500 Earnings: The earnings season is now in full swing with 147 companies in the S&P 500 scheduled to report, including AAPL, FB, AMZN, BA, GE, CAT, CVX, XOM, PFE, AMGN, MA, MCD and SBUX. With 17% of companies reporting, 73% and 67% exceeded earnings and sales estimates respectively. Blended earnings expectations for Q4 improved to -1.9% year-over-year (Y/Y) from      -2.1% and sales improved to 2.9% Y/Y from 2.7%. The technology sector was the main driver for the upward earnings revision. 2020 earnings estimated remained at 9.5% Y/Y.
  • Europe: 4Q Eurozone GDP expected at 1.1% Y/Y, down from 1.2%. Eurozone January consumer inflation should rise to 1.4% Y/Y while the unemployment rate remains at 7.5%. January German IFO business sentiment fell but remains above recent lows. Governor Carney’s last Bank of England (BOE) meeting is a close call with a rate cut possible but consensus expecting no policy change.
  • Asia: Japan’s job market remains tight with December unemployment rate and job-to-applicant ratio forecast at 2.3% and 1.57. January China manufacturing PMI should be near the growth/contraction line of demarcation of 50.0 with non-manufacturing PMI expected at 53.
  • Central Banks: In addition to the Fed and the BOE, the central banks of Kenya, Angola, Pakistan, Hungry, Chile, Sri Lanka, Georgia, Ukraine, Ghana, Bulgaria, Dominican Republic and Colombia meet with Ukraine and Ghana expected to cut monetary policy rates.

  WEEK IN REVIEW

  • Stocks encountered turbulence as the coronavirus news combined with excessive positive sentiment sent the S&P 500 -1.0% lower for the week. Utilities +2.4%, real estate +1.0% and information technology +0.3% outperformed the S&P 500, while energy -4.3%, materials -2.3% and financials -2.2% were the biggest laggards. WTI -7.4% and Brent -6.4% crude oil prices were down for the week, impacting the energy sector -4.3% and MLPs -5.7%. Small cap stocks underperformed the S&P 500 with the Russell 2000 down -2.2%. The 10-year U.S. Treasury yield fell to 1.68%. High yield credit spreads widened, reflecting decreased risk appetite.
  • The U.S. dollar was stronger against both developed and emerging market currencies. Developed international stocks as measured by MSCI EAFE outperformed the S&P 500 returns in both U.S. dollar terms (-0.6%) and on a hedged-currency basis (-0.5%). Emerging market stocks underperformed the S&P 500 with the non-hedged return of -2.4% for MSCI EM.
  • The 10-2 yield curve flattened to +19 basis points. Another curve measure of three-month yield six quarters forward – three-month yield inverted 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 continues to reflect 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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January 2017

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