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 20, 2019

Chart of the Week:  U.S. stocks are reflecting easing trade tensions and a more optimistic view of the global economy with S&P 500 earnings expected to resume growth in 2020. The rebound in earnings is expected to be powered by an improvement in both international sales and cyclical sectors like energy, industrials and materials. Please see our earnings preview below for more details. U.S. stocks are not alone as international stocks and global yields are also reflecting better prospects for the global economy. Since the end of 3Q, developed international stocks aren’t far behind and emerging markets are outperforming the S&P 500. The U.S. yield curve has steepened to the biggest difference between 10-year and 2-year Treasury yields in the last year. Recall that when the difference was negative in August, some were sounding alarm bells warning of imminent recession. The total global market capitalization of bonds with a negative yield has fallen since August, reflecting higher yields with the improvement in expectations for global growth. Avalon wishes you and your family a happy holiday season and a prosperous New Year!

  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 limited trade deal. Treasury Secretary Mnuchin said that the phase one trade deal should be signed in early January and President Trump said that he spoke with China’s President Xi and that a formal signing of the deal is “being arranged.” The House voted to impeach President Trump on two articles, but Speaker Pelosi is delaying the delivery to the Senate until there is agreement on the trial’s parameters. U.S. markets close early on Christmas Eve with U.S. and European markets closed for Christmas Day.
  • U.S.: Durable goods orders for November should improve to 1.5% month-over-month (M/M) while excluding transportation decelerate to 0.2% M/M. November new home sales should maintain a roughly 730,000 annualized pace. Weekly initial jobless claims are forecast to fall to 220,000. The Atlanta and NY Fed currently estimate 4Q GDP growth at 2.14% and 1.32%.
  • S&P 500 Earnings Preview: 4Q 2019 earnings season begins the week of January 14 with earnings expected to decline -1.4% year-over-year (Y/Y), which would leave earnings almost unchanged for the calendar year. While much of the weakness in earnings for 2019 was driven by the international exposure of S&P 500 companies, analyst forecasts for 2020 reflect a rebound in earnings for companies with more international sales. Consensus estimates expect earnings to grow by 9.6% Y/Y in 2020, but Avalon forecasts that 5 - 7% growth is more likely.
  • Europe: There are no significant data releases in the Eurozone. U.K. Parliament is scheduled to debate Brexit legislation in early January to depart the E.U. by the January 31 deadline.
  • Asia: October Japan all industrial activity fell to -4.3%, but November retail trade should rebound from the tax hike’s impact in October. Japan’s November employment data should reflect a tight job market with 2.4% unemployment. China November industrial profits are scheduled to be released.
  • Central Banks: The central banks of Sri Lanka, Egypt and Trinidad & Tobago meet with Egypt expected to cut its policy rate.

  WEEK IN REVIEW

  • The S&P 500 closed the week at another all-time high, posting 1.7% weekly gain. Utilities (+2.7%), real estate (+2.7%) and communication services (+2.5%) outperformed the S&P 500, while industrial (+0.3%), financial (+0.5%) and materials (+1.2%) were the biggest laggards. WTI (+0.6%) and Brent (+1.4%) crude oil prices were up for the week, helping the energy sector (+2.5%) and MLPs (+4.2%). Small cap stocks outperformed the S&P 500 with the Russell 2000 up +2.1%. The 10-year U.S. Treasury yield climbed up to 1.92%. High yield credit spreads narrowed, reflecting increased risk appetite.
  • The U.S. dollar was stronger against developed and weaker against emerging market currencies. Developed international stocks as measured by MSCI EAFE underperformed the S&P 500 returns in both U.S. dollar terms (+0.6%) and on a hedged-currency basis (+1.2%). Emerging market stocks outperformed the S&P 500 with the non-hedged return of +1.9% for MSCI EM.
  • The 10-2 yield curve widened to +29 basis points. Another curve measure of three-month yield six quarters forward – three-month yield widened to +19 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 and 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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