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 November 15, 2019

Chart of the Week: In recent weeks we have highlighted the stabilization of global economic data, but another trend unfolding is the outperformance of value investing versus growth and price momentum strategies. Momentum strategies invest in recent winners, while growth investing focuses on companies with higher expected earnings growth. Value investing strategies have underperformed the S&P 500 along with growth and momentum by a wide margin for the past decade (see chart). The tide has seemingly started to turn since the end of August. Why? After a decade of underperformance, value stocks are relatively cheap and growth stocks expensive. Will it last? Long-term data and behavioral biases indicate that value should outperform over the long-term, but clearly there can be significant periods of underperformance. Value underperformed last week, but outperformance is rarely in a straight line. In our view, investors who are significantly underweight value would be wise to revisit their allocations.

  WEEK IN PREVIEW

  • Geopolitical: Markets will monitor the progress of phase one trade negotiations between the U.S. and China. The agreement could be signed by Presidents Trump and Xi in mid-November through December. While the scope of this “phase one” agreement is unknown, even a détente would be market positive. 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. Public impeachment hearings continue in the U.S.
  • U.S.: Housing data expected to rebound in October for both housing starts and existing home sales, while building permits should decline slightly. Markit US manufacturing and services PMIs for November forecast to firm to 51.5 and 51.2 respectively.The Fed releases minutes for the October meeting and delivers four speeches, but little new insight into future policy should be expected at this point. The Atlanta and NY Fed currently estimate 4Q GDP growth at 0.31% and 0.39%, respectively, but these estimates are likely too low due to lack of 4Q data so far.
  • 3Q S&P 500 Earnings: With 92% of companies having reported, 75% and 60% have exceeded earnings and sales estimates respectively. Earnings improved to -2.3% year-over-year (Y/Y), while sales rose to 3.1% with multiple sectors contributing. Technology and staples sectors were the main drivers of the earnings improvement last week. Fifteen companies are scheduled to report this week with a heavy emphasis on retailers.
  • Europe: Eurozone economy should show some signs of life as November manufacturing PMI is expected to tick up to 46.4 and services PMI increased to 52.4, supported by likely improvement in Germany. The UK’s political parties start publishing their platforms before the December 12 general election which was scheduled after the E.U. granted a Brexit deadline delay until January 31.
  • Asia: Both Japan imports and exports for October are expected to contract at a faster pace Y/Y at -15.4% and -7.5% respectively. Japan October CPI expected at 0.3% Y/Y. China data calendar is empty of any important releases.
  • Central Banks: The central banks of Hungary, Mauritius, Zambia, Indonesia and South Africa meet with no changes in monetary policy rates expected. 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 +0.9%, achieving another all-time high as retail sales and the earnings season continued to provide a positive surprise along with support from trade news. Healthcare (+2.4%), real estate (+1.9%) and utilities (+1.5%) outperformed the S&P 500, while energy (-1.3%), financials (-0.3%) and consumer discretionary (-0.2%) were the biggest laggards. WTI (+0.8%) and Brent (+1.3%) crude oil prices were higher for the week, but the energy sector (-1.3%) and MLPs (-2.0%) could not keep pace. Small cap stocks underperformed with the Russell 2000 down -0.2%. The 10-year U.S. Treasury yield moved lower to 1.83%. High yield credit spreads widened, reflecting decreased risk appetite which is at odds with the move higher in stocks.
  • The U.S. dollar was weaker against developed currencies but stronger against emerging market currencies. Developed international stocks as measured by MSCI EAFE underperformed the S&P 500 returns both in U.S. dollar terms (-0.3%) and on a hedged-currency basis (0.0%). Emerging market stocks underperformed the S&P 500 with the non-hedged return of -1.5% for MSCI EM.
  • The 10-2 yield curve flattened to +22 basis points. Another curve measure of three-month yield six quarters forward – three-month yield also narrowed to +11 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 as much as one net hike in short-term rates over the next year and a half. Our view remains that the Federal Reserve is on hold for the remainder of 2019 and 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.

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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