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 December 13, 2019

Chart of the Week: While the broader market as measured by the S&P 500 continues to hit new all-time highs, the financial sector remains below the level reached more than a decade ago (see chart). Financial companies were ground zero for the financial crisis, so it isn’t a surprise that the sector was punished, declining almost 84% from the high in early 2007 to the 2009 low. With the S&P 500 having now eclipsed its 2007 high by more than 100%, the financial sector is just now on the doorstep of reaching its 2007 peak. Regional banks did not fare quite as badly during the crisis but still declined almost 71% off their late 2006 peak. To put these declines into perspective, the S&P 500 fell almost 57% from October 2007 high to the March 2009 low. Banks have outperformed the general market since the end of the third quarter as economic fears have eased and the yield curve has steepened. If banks continue to perform well, it likely bodes well for value and small cap indexes since financials comprise a good portion of their market capitalization.

  WEEK IN PREVIEW

  • Geopolitical: Markets will continue to monitor the details of phase one and progress on phase two trade negotiations after the U.S. and China reached a phase one agreement last week, including agricultural purchases by China and a rollback of some current U.S. tariffs and cancelation of the new tariffs on Chinese goods scheduled to take effect on December 15. The U.S. House votes on the two articles of impeachment of President Trump which will lead to a trial in the Senate where he will likely be acquitted. U.S. lawmakers are reported to have reached a tentative agreement on federal spending to avoid a government shutdown on Friday.
  • U.S.: The December Markit U.S. manufacturing PMI provides a glimpse at the current state of the economy and is expected to hold steady at 52.6. Personal income and spending for November are expected to accelerate versus October. There are several earnings reports, including FedEx, Nike and Micron Technology. The Atlanta and NY Fed currently estimate 4Q GDP growth at 1.95% and 0.69%. Money markets and another potential repo squeeze will be watched, but the Fed has made nearly $500 billion in liquidity available.
  • Europe: December Markit Eurozone manufacturing PMI deteriorated to 45.9 from 46.9 while the German reading fell to 43.4, but the easing of trade tensions should support the bottoming in activity. The German economic sentiment should show improvement in the December IFO business climate and expectations. The U.K.’s Markit PMI readings for manufacturing and services fell to 47.4 and 49.0. Much uncertainty around Brexit is removed after the historic electoral win for the Conservatives with the U.K. set to depart the European Union on January 31 but the transition period is expected through at least 2020.
  • Asia: Japan November trade data and consumer inflation are on tap. China showed stabilization with better than expected November industrial production at 6.2% year-over-year and retail sales at 8.0%.
  • Central Banks: The central banks of Hungary, Morocco, Thailand, Czech Republic, Indonesia, Japan, Taiwan, Sweden, Norway, England, Mexico and Colombia meet with Sweden expected to end negative rates by moving to zero and Mexico to cut their policy rate.

  WEEK IN REVIEW

  • The S&P 500 posted 0.7% weekly gain to reach a new all-time closing high, supported by clarity on trade and Brexit. Information technology (+2%), consumer discretionary (+1.1%) and financials (+1.0%) outperformed the S&P 500, while real estate (-2.6%), communication services (-0.7%) and utilities (+0.1%) were the biggest laggards. WTI (+1.5%) and Brent (+1.3%) crude oil prices were up for the week, helping the energy sector (+0.8%) and MLPs (+4.5%). Small cap stocks underperformed with the Russell 2000 only up +0.3%. The 10-year U.S. Treasury yield ticked down to 1.82%. High yield credit spreads narrowed, reflecting increased risk appetite.
  • The U.S. dollar was weaker against developed and emerging market currencies. Developed international stocks as measured by MSCI EAFE outperformed the S&P 500 returns in both U.S. dollar terms (+1.7%) and on a hedged-currency basis (+1.1%). Emerging market stocks outperformed the S&P 500 with the non-hedged return of +3.6% for MSCI EM.
  • The 10-2 yield curve flattened slightly to +21 basis points. Another curve measure of three-month yield six quarters forward – three-month yield narrowed to +14 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 very little net moves in short-term rates over the next year and a half. Our view remains that the Federal Reserve is likely on hold for 2020. 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.

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Phan Phan Duong, Senior Analyst

 

Henry J. Lartigue, CFA, Managing Partner

 

Samuel E. Rines, Chief Economist

 

Bill Stone, CFA, CMT, Chief Investment Officer

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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News | Press

Avalon Advisors, LLC Announces new Co-Chief Investment Officer

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