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: FactSet, Avalon Investment & Advisory as of October 14, 2019

Chart of the Week: S&P 500 3Q earnings season begins in earnest with 52 companies set to report with a heavy emphasis on financials. Earnings are expected to be down -3.8% year-over-year (Y/Y) with six out eleven sectors posting declines, led by energy at about -30% Y/Y. Oil prices at the end of Q3 2019 are about 30% lower than Q3 2018 with the average price 19% lower. Technology is expected to post a -10% Y/Y decline with semiconductors the driver. While Avalon expects the actual results to be better than expectations, another quarterly decline in earnings should be expected due to difficult comparisons and a slowing global economy. If 3Q posts an earnings decline, this will be the first time with three straight quarters of Y/Y earnings decline since 4Q 2015 to 2Q 2016.  It is worth noting that the S&P 500 rose during this 2015-16 period and the current period. 4Q earnings should snap the string of negative Y/Y earnings quarters as it will benefit from easier comparisons and likely some lift due to the thaw in the trade dispute between the U.S. and China following the recent agreement. Please see our Geopolitical section below for more details about the phase one of the trade truce.

  WEEK IN PREVIEW

  • Geopolitical: Phase one of a trade truce between the U.S. and China was reached with expectations for a future phase of trade negotiations. The U.S. suspended the October 15 U.S. tariff increase from 25% to 30% on $250B of imports. China agreed to 1)$40-50B of purchases of U.S. agriculture, 2)currency transparency, and 3)opening market access for U.S. financial firms. The exact details of the deal are uncertain and still to be negotiated, but it will be written up over the next few weeks with an expectation that the agreement would be signed by Presidents Trump and Xi at the APEC Summit in mid-November. While more difficult issues were left to future phases, any de-escalation of tensions is an unmitigated positive for the global economy and stocks. Movement of the Yuan/U.S. dollar and tweets will be closely watched for any signs of deterioration or improvement in sentiment around completion of this phase and future phases.
  • U.S.: With manufacturing arguably in recession, September retail sales will be the focus of attention to get a measure of consumer strength. September building permits, housing starts and industrial production are all expected to decline for the month. Fed Beige Book and 13 speeches by Fed members will be parsed for clues as to the timing of future rate cuts. The Atlanta and NY Fed currently estimate 3Q GDP growth at 1.72% and 2.03%, respectively.
  • Europe: German October ZEW survey expected to sink further as the country nears recession. The British pound posted its biggest two-day rally in 25 years at the end of last week as markets raised the odds of a Brexit deal being reached. The E.U. summit on Thursday and Friday will be a major focal point for the details of any deal with the October 31 Brexit deadline looming.
  • Asia: Japan consumer inflation for September expected to decline to 0.2% Y/Y. China September trade data continued to reflect the pain of the trade war and slowing global growth with both imports and exports declining Y/Y. September industrial production and retail sales are expected to improve Y/Y. China 3Q GDP expected to slow to 6.1% Y/Y from 6.2%.
  • Central Banks: The central bank of South Korea meets and is expected to cut rates. Avalon expects the global central banks will continue to ease policy to offset the trade drag on growth.

  WEEK IN REVIEW

  • The S&P 500 was +0.6% for the week as phase one of the U.S. and China trade truce was agreed to and there were optimistic signs that a no-deal Brexit would be avoided. Materials (+1.9%), industrials (+1.5%) and information technology (+1.3%) outperformed the S&P 500, while utilities (-1.4%), consumer staples (-0.9%) and real estate (-0.6%) were the biggest laggards. WTI (+3.6%) and Brent crude (+3.7%) oil prices were up for the week, helping the energy sector (+1.0%) but not MLPs (-2.9%). Small cap stocks outperformed with the Russell 2000 up +0.8%. The 10-year U.S. Treasury yield rose to 1.73%. High yield credit spreads narrowed, reflecting increased risk appetite.
  • The U.S. dollar was weaker against both developed currencies and emerging market currencies. Developed international stocks as measured by MSCI EAFE outperformed the S&P 500 returns in both U.S. dollar terms (+2.3%) and on a hedged-currency basis (+2.0%). Emerging market stocks outperformed the S&P 500 with the non-hedged return of +1.5% for MSCI EM.
  • The 10-2 yield curve widened to +13 basis points. Another curve measure of three-month yield six quarters forward – three-month yield became less inverted and ended the week at -13.4 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 almost one net cut in short-term rates over the next year and a half in the wake of the trade deal. Our view remains that the odds of a recession over the next twelve months remain below 50% and Avalon expects one additional rate cut of 0.25% from the Federal Reserve in 2019. 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.

Phan Phan Duong, Senior Analyst

 

Henry J. Lartigue, CFA, Managing Partner

 

Samuel E. Rines, Chief Economist

 

Bill Stone, CFA, CMT, Chief Investment Officer

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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. ©2019 Avalon Investment & Advisory. All rights reserved.

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November 2017

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Third Quarter,  2017

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News | Press

Avalon Advisors, LLC Announces new Co-Chief Investment Officer

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