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 November 1, 2019

Chart of the Week: 90 S&P 500 companies are scheduled to report 3Q earnings this week, but the results are unlikely to change the positive earnings story with 71% of the companies having already reported results, 76% and 61% have exceeded consensus earnings and sales estimates, respectively. Earnings are running at a -2.7% year-over-year (Y/Y) pace while sales are growing at +3.1% Y/Y. While earnings are still contracting Y/Y, they are significantly better than the -4.1% pace expected at the start of the earnings season. Earnings improved last week due to beats across many sectors with healthcare and technology the primary drivers. Earnings next year are expected to reaccelerate. Earnings weakness in 2019 has been driven primarily by the international segments of companies and the slowing global economy.

  WEEK IN PREVIEW

  • Geopolitical: Markets will monitor the progress of phase one trade negotiations. Headlines from both China and the U.S. last week indicated that there has been constructive discussion. It is expected that the agreement would be signed by Presidents Trump and Xi 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. China President Xi is scheduled to speak in Shanghai. OPEC releases its World Oil Outlook.
  • U.S.: Less data this week and none expected to change the narrative that the economy might be passing the worst of the slowdown. This narrative was reinforced by last week’s strong job report. The October ISM non-manufacturing index is expected to improve to 53.4 from 52.6. At least 11 speeches by Federal Reserve (Fed) members will reinforce that the Fed is on pause after the third consecutive cut last week, but there is not a hike contemplated for the foreseeable future. The Atlanta and NY Fed currently estimate 4Q GDP growth at 0.80% and 1.07%, respectively, but these estimates are likely too low due to lack of 4Q data so far.
  • Europe: Eurozone retail sales for September should improve to 2.4% year-over-year (Y/Y). German September data expected to show factory orders improve slightly but still running at -6.3% Y/Y while industrial production continues to contract at -4.3% Y/Y. German trade data is also on tap. The Brexit outcome is back up in the air with a U.K. general election scheduled for December 12 and the E.U. granting a Brexit deadline delay until January 31. Depending on the results of the election and any referendum following it, the Brexit path should become clearer. The Bank of England meets and will keep monetary policy unchanged with the election looming.
  • Asia: Japan September household spending should jump to 7.1% Y/Y with consumers buying ahead of the October sales tax hike. October China Caixin PMI services expected to improve at 51.5. China October trade data will be monitored with both exports and imports expected to remain in contraction at -3.8% and -7.6% Y/Y, respectively. China CPI expected at 3.2% Y/Y.
  • Central Banks: In addition to the Bank of England, the central banks of Australia, Malaysia, Thailand, Iceland, Belarus, Poland, Romania, Serbia, Czech Republic and Peru meet with Thailand expected to cut rates. Malaysia could surprise with a cut as well. 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 +1.5% and sits at an all-time high as earnings season continued to provide a positive surprise along with support from the jobs report and the Fed rate cut. Healthcare (+3.0%), information technology (+2.1%) and industrials (+2.0%) outperformed the S&P 500, while real estate (-0.7%), energy (-0.3%) and utilities (-0.1%) were the biggest laggards. WTI (-0.8%) and Brent (-0.5%) crude oil prices were lower for the week, impacting the energy sector (-0.3%) and MLPs (-1.9%). Small cap stocks outperformed with the Russell 2000 up +2%. The 10-year U.S. Treasury yield declined to 1.71%. Despite the rally in stocks and better economic data, high yield credit spreads widened.
  • The U.S. dollar was weaker against both developed currencies and emerging market currencies. Developed international stocks as measured by MSCI EAFE underperformed the S&P 500 returns both in U.S. dollar terms (+1.2%) and on a hedged-currency basis (+0.5%). Emerging market stocks underperformed the S&P 500 with the non-hedged return of +1.3% for MSCI EM.
  • The 10-2 yield curve slightly narrowed to +15 basis points. Another curve measure of three-month yield six quarters forward – three-month yield is no longer inverted and ended the week at +5.2 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 no net cuts in short-term rates over the next year and a half. Our view remains that the 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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