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: Bloomberg, Avalon Investment & Advisory as of October 21, 2019

Chart of the Week: October PMI readings on Thursday for the Eurozone, Japan and the U.S. will provide insight into the current state of much of the global economy. China reports PMI data the following week. Global manufacturing readings have been weakening since mid-2018, weighing on global growth with arguably some areas like the Eurozone currently experiencing a manufacturing recession with a PMI reading well below 50 (see chart). Key to the weakness in the Eurozone has been extreme weakness in Germany. German manufacturing PMI is expected to show a slight increase which could signal some stabilization in the Eurozone readings. U.S. PMI data is likely to be watched closely with recent data painting a mixed but not recessionary picture for the overall U.S. economy. Stabilization in manufacturing PMI readings along with a reduction in uncertainty if we get a Brexit deal and a trade agreement between the U.S. and China could provide a significant boost to sentiment and expected economic growth.

  WEEK IN PREVIEW

  • Geopolitical: Markets will monitor the progress of phase one trade negotiations between the U.S. and China. It is expected that the agreement would be signed by Presidents Trump and Xi at the APEC Summit in mid-November. 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. Canada holds a federal election on Monday.
  • U.S.: New home sales and existing home sales for September expected to decline, but the uptrend should remain intact. September durable goods orders should decline for both the headline reading and excluding transportation. The Atlanta and NY Fed currently estimate 3Q GDP growth at 1.81% and 1.94%, respectively.
  • S&P 500 3Q Earnings: With 15% of companies reporting, 84% and 64% have exceeded consensus earnings and sales estimates respectively. Earnings are running at a -4.7% year-over-year (Y/Y) pace while sales are growing at +2.6%. The healthcare and financials sectors had better than expected earnings results last week which was offset by worse results from the energy sector.
  • Europe: Eurozone consumer confidence for October expected to decline further. October IFO German business climate should fall as well. Parliament voted 322 to 306 on Saturday to delay PM Johnson's Brexit deal with the EU. U.K. media are reporting that Johnson has enough support to get his Brexit deal through Parliament. If the vote were to fail, a three-month Brexit delay beyond the October 31 deadline would be likely, assuming all EU members agree to the extension. European Central Bank (ECB) is not likely to alter policy in President Draghi’s last meeting after voting for rate cuts and resuming asset purchases in September.
  • Asia: Japan September trade data showed exports and imports down -5.2% and -1.5% respectively. The China data calendar is quiet this week.
  • Central Banks: In addition to the ECB, the central banks of Hungary, Chile, Namibia, Georgia, Indonesia, Sweden, Norway, Ukraine, Turkey and Russia meet with Chile, Indonesia, Ukraine, Turkey and Russia 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 gained +0.5% as earnings season began. Healthcare (+2.0%), real estate (+1.8%) and financials (+1.6%) outperformed the S&P 500, while energy (-1.7%), information technology (-0.9%) and consumer staples (-0.2%) were the biggest laggards. WTI (-1.7%) and Brent (-1.8%) crude oil prices were down for the week, impacting the energy sector (-1.7%) and MLPs (-0.7%). Small cap stocks outperformed with the Russell 2000 up +1.6%. The 10-year U.S. Treasury yield rose to 1.75%. 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 U.S. dollar terms (+1.2%) but underperformed on a hedged-currency basis (+0.4%). Emerging market stocks outperformed the S&P 500 with the non-hedged return of +1.2% for MSCI EM.
  • The 10-2 yield curve widened to +18 basis points. Another curve measure of three-month yield six quarters forward – three-month yield became less inverted and ended the week at -9.7 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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