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 25, 2019

Chart of the Week: Last week brought further evidence of stabilization in global economic data. In fact, there seems to be a good case to be made that the data might have hit bottom with the U.S., Eurozone and Japan manufacturing PMI readings all improving for November (see chart). PMI data for China will be released on Friday. The tariffs as part of the trade dispute seem to have been absorbed, but the future path of the possible trade truce remains a major variable for the outlook. Because a trade truce between the U.S. and China is so pivotal to marginal economic growth expectations, markets will continue to react to news flow around the negotiations. The consumer continues to provide a strong foundation for the U.S. economy, so recession fears have rightly receded. The holiday shopping season should be brisk with only four weeks between Thanksgiving and Christmas this year and jobs remaining plentiful. Though Black Friday should see strong sales, it is less meaningful with more shopping moving online.

  WEEK IN PREVIEW

  • Geopolitical: Markets will monitor the progress of the phase one trade negotiations between the U.S. and China. Separately, Congress passed a bill requiring an annual review of Hong Kong’s special trading status with the U.S. and sent it to the president. China threatened retaliation if the legislation is enacted which could complicate the completion of phase one. 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.: Housing data is expected to reflect improvement with both new and pending home sales increasing in October. October durable goods orders along with personal income and spending are also on tap. The Fed releases its Beige Book and Chair Powell speaks, but little new insight into future policy should be expected. The Atlanta and NY Fed currently estimate 4Q GDP growth at 0.42% and 0.71%, respectively. U.S. markets are closed Thursday for the Thanksgiving holiday and close early on Black Friday, the traditional start of the holiday shopping season.
  • 3Q S&P 500 Earnings: With 96% of companies having reported, 75% and 59% have exceeded earnings and sales estimates respectively. Earnings improved to -2.2% year-over-year (Y/Y), while sales rose to 3.1%. The consumer discretionary sector was the main driver of earnings improvement last week. Twelve companies are scheduled to report this week.
  • Europe: The November German IFO confidence improved with European Commission’s Eurozone sentiment on tap. November consumer inflation for both the Eurozone and Germany expected to rise Y/Y but decline for the month. UK’s political campaigns continue before the December 12 general election with the path forward to the January 31 Brexit deadline in the balance.
  • Asia: Japan reports October retail sales, which should decline sharply following the sales tax hike. Japan unemployment is expected to remain at 2.4% for October. China official PMI data for November will be released on Friday night.
  • Central Banks: The central banks of Israel, Kenya, Ghana, Nigeria, Guatemala, South Korea, Sri Lanka, Angola, Bulgaria and the Dominican Republic meet with Israel and Kenya expected to cut monetary policy 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 declined -0.3% as conflicting headlines regarding the status of the phase one trade agreement between the U.S and China weighed on sentiment. Healthcare (+0.8%), financials (+0.5%) and utilities (+0.2%) outperformed the S&P 500, while materials (-1.7%), real estate (-1.2%) and technology (-0.8%) were the biggest laggards. WTI (+0.1%) and Brent (+0.1%) crude oil prices were fractionally higher for the week, but the energy sector (-0.5%) and MLPs (-0.5%) could not keep pace. Small cap stocks underperformed with the Russell 2000 down -0.5%. The 10-year U.S. Treasury yield moved lower to 1.77%. 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 underperformed the S&P 500 returns both in U.S. dollar terms (-0.6%) and on a hedged-currency basis (-0.4%). Emerging market stocks outperformed the S&P 500 with the non-hedged return of -0.02% for MSCI EM.
  • The 10-2 yield curve flattened to +14 basis points. Another curve measure of three-month yield six quarters forward – three-month yield also narrowed to +9 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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