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: Bloomberg, Avalon Investment & Advisory, Bloomberg as of December 9, 2019

Chart of the Week: Last week, the November jobs report exceeded even optimistic estimates beyond the boost from the end of the GM strike. Nonfarm payrolls rose by 266,000 and the unemployment rate fell to the cycle low of 3.5% (see chart). While being careful not to read too much into one report, the strong job market should remove any worries regarding an imminent U.S. recession. Between robust job growth and wages growing at 3.1% year-over-year, the consumer should continue to support economic expansion. In addition, the Fed was already unlikely to change monetary policy this week with this report sealing that outcome. Clearly stocks had already sniffed out the exiting of the soft patch with the S&P 500 rising almost 6% since the end of the third quarter. As noted last week, the better economic data and steepening yield curve should support better performance from small-cap stocks. Trade negotiations will continue to drive volatility, but data is supportive of risk assets.

  WEEK IN PREVIEW

  • Geopolitical: Markets will continue to monitor the progress of the phase one trade negotiations between the U.S. and China with the next tariff deadline looming on December 15. 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. House Judiciary Committee holds hearings on impeachment.
  • U.S.: The December National Federation of Independent Business (NFIB) Small Business Optimism Index should rise to 103%. November consumer (CPI) and producer (PPI) inflation readings are released with CPI expected to rise to 2.0% year-over-year (Y/Y). The Fed is widely expected to hold interest rates steady after the three rate cuts in 2019, followed by Chairman Powell’s press conference. November retail sales should continue to show a strong consumer bolstered by a strong job market as evidenced by the job report last week. The Atlanta and NY Fed currently estimate 4Q GDP growth at 1.96% and 0.58%.
  • Europe: The European Central Bank (ECB) meets, the first with President Lagarde, with no change in monetary policy expected. German ZEW sentiment expected to improve for December. Consensus calls for October U.K. industrial production improving to -1.2% and manufacturing production to -1.4% Y/Y. The U.K. holds a general election with the path forward to the January 31 Brexit deadline in the balance.
  • Asia: Japan 3Q GDP was revised higher to 1.8% annualized growth from 0.2%. Japan 4Q Tankan large manufacturing and non-manufacturing indexes expected to post lower readings but the outlook indicators should move higher. Japan PM Abe is expected to win approval for his U.S. trade deal. With the trade war continuing to weigh on the data, China November trade showed imports at +0.3% and exports at -1.1% Y/Y.
  • Central Banks: In addition to the Fed and the ECB, the central banks of Kazakhstan, Uganda, Iceland, Brazil, Georgia, the Philippines, Switzerland, Turkey, Serbia, Ukraine, Peru, Mozambique and Russia meet with Brazil, Turkey, Ukraine and Russia expected to cut monetary policy rates. Avalon expects the global central banks will continue to ease policy to offset the trade drag on growth, while the pace will be slower after the Fed has paused.

 

 

  WEEK IN REVIEW

  • The S&P 500 rose 0.2% with stocks trading higher on Friday on the back of the robust nonfarm payroll report. Energy (+1.5%), consumer staples (+0.9%) and healthcare (+0.9%) outperformed the S&P 500, while industrial (-1.1%), consumer discretionary (-0.8%) and information technology (-0.4%) were the biggest laggards. WTI (+7.3%) and Brent (+3.1%) crude oil prices were up for the week, helping the energy sector (+1.6%) but MLPs still declined (-0.5%). Small cap stocks outperformed with the Russell 2000 up +0.6%. The 10-year U.S. Treasury yield moved higher to 1.84%. High yield credit spreads narrowed, reflecting increased risk appetite.
  • The U.S. dollar was weaker 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 (+0.4%) and on a hedged-currency basis (-0.3%). Emerging market stocks outperformed the S&P 500 with the non-hedged return of 0.9% for MSCI EM.
  • The 10-2 yield curve steepened to +22 basis points. Another curve measure of three-month yield six quarters forward – three-month yield also 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 on hold for the remainder of 2019 and possibly 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.

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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