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, Strategas as of December 27, 2019

Chart of the Week:  Barring an epic meltdown in the last two trading days of 2019, the S&P 500 will have gained more than twenty percent in the calendar year. Contrary to what some might believe, stocks have generally continued to perform better following years with more than 20% S&P 500 returns (see table). Another reason to not be as hesitant of the almost thirty percent return this year is that a good portion of the return was just recapturing the almost twenty percent loss at the end of 2018. Looking at the S&P 500 over the last two years, the annualized return is a more reasonable 10.1%. While the 2020 election is looming and sentiment is currently elevated, stocks enter 2020 with better news regarding U.S.- China trade tension, economic growth, the Federal Reserve and corporate earnings. Avalon sees a very low risk of recession in 2020 and a Fed which is not likely to act in either direction. Please see our earnings preview below for more information. Wishing you and your family a healthy and 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. President Trump and China’s President Xi should have a formal signing of the phase one trade deal in January. The U.S. bond market closes early on New Year’s Eve with the U.S. and most global markets closed for New Year’s Day.
  • U.S.: Among the housing data released, the November pending home sales is expected to accelerate to 7.4% year-over-year (Y/Y). December ISM manufacturing is forecast to improve to 49.0 from 48.1, likely reflecting a bottoming in the global economy. Ward’s total vehicle sales for December should run at a 17 million annualized rate. The week ends with Fedspeak: 5 Fed officials are scheduled to make comments and the FOMC minutes will be released. The Atlanta and NY Fed currently estimate 4Q GDP growth at 2.28% and 1.19%.
  • S&P 500 Earnings Preview: 4Q 2019 earnings season begins the week of January 14 with earnings expected to decline -1.4% 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. Strongest 2020 earnings growth are forecast for the energy, industrials and materials sectors. Consensus estimates expect earnings to grow by 9.6% Y/Y in 2020, but Avalon forecasts that 5-7% growth is more likely.
  • Europe: German November retail sales are expected at 1.1% Y/Y and December consumer inflation is forecast at 1.4% Y.Y. U.K. Parliament is scheduled to debate Brexit legislation in early January in order to depart the E.U. by the January 31 deadline.
  • Asia: There are no significant releases from Japan. China December official PMI and the Caixin manufacturing PMI data are expected to be slightly weaker than November.
  • Central Banks: The central banks of Bulgaria and Dominican Republic are scheduled to meet.

  WEEK IN REVIEW

  • The S&P 500 closed the week at another all-time high, posting 0.6% weekly gain. Consumer discretionary (+1.5%), technology (+1.1%) and materials (+0.6%) outperformed the S&P 500, while consumer staples (+0.2%), health care (+0.2%) and communication services (+0.2%) were the biggest laggards. WTI (+2.1%) and Brent (+3.1%) crude oil prices were up for the week, helping the energy sector (+0.6%) and MLPs (+0.9%). Small cap stocks underperformed the S&P 500 with the Russell 2000 down -0.2%. The 10-year U.S. Treasury yield fell to 1.88%. High yield credit spreads widened, reflecting decreased risk appetite but at odds with stocks for the week.
  • 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 U.S. dollar terms (+0.7%) but underperformed on a hedged-currency basis (+0.3%). Emerging market stocks outperformed the S&P 500 with the non-hedged return of +1% for MSCI EM.
  • The 10-2 yield curve held steady at +29 basis points. Another curve measure of three-month yield six quarters forward – three-month yield narrowed to +12 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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News | Press

Avalon Advisors, LLC Announces new Co-Chief Investment Officer

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