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, FactSet as of February 10, 2020

Chart of the Week:  With 64% of companies reporting 4Q earnings, 71% and 67% exceeded earnings and sales estimates. Blended earnings expectations for Q4 improved to +0.7% year-over-year (Y/Y) from the -1.7% at year-end, while sales improved to 3.5% Y/Y from 2.8% (see chart). The communication services sector via Alphabet was the main driver for the earnings improvement last week. Managements have not given much guidance about the impact of coronavirus on 1Q earnings due to the significant uncertainty around the duration and severity of the outbreak. Consensus earnings growth estimates for 1Q have almost been cut in half though. A large part of the earnings should not be lost, just delayed until after the outbreak disruptions have receded. U.S. and global 1Q GDP growth will be negatively impacted but should rebound later in the year.

  WEEK IN PREVIEW

  • Geopolitical: China and the U.S. implement part of the Phase One trade deal on Friday by lowering tariffs on billions of dollars of imports. Developments regarding coronavirus spread and its potential impacts on the global economy and earnings will be monitored. After the issues surrounding the vote counts in the Iowa Caucus, the New Hampshire Democratic primary takes on even more importance. Sinn Féin upended the traditional parties signaling the rise of nationalism and populism in Ireland and will be a part of forming the government.
  • U.S.: Consumer inflation is expected to accelerate to 2.4% Y/Y in January but, excluding food and energy, should decelerate to 2.2% Y/Y. Industrial production was likely less bad in January at -0.2% month-over-month (M/M). February consumer confidence expects to moderate but remain strong at 99.3. Federal Reserve (Fed) Chair Powell delivers his semiannual monetary policy report to Congress which will note that coronavirus is a new threat to the outlook. Lots of other Fedspeak to monitor with at least 10 other speeches by Fed members on tap. Headline January retail sales for January are expected to hold steady at 0.3% M/M. The Atlanta and NY Fed currently estimate 1Q 2020 GDP growth at 2.74% and 1.67% respectively.
  • Q4 S&P 500 Earnings: 65 companies in the S&P 500 scheduled to report this week, including CSCO, PEP, KHC and AIG. Please see the Chart of the Week for more details.
  • Europe: Eurozone December industrial production should be weak, contracting -1.7%                    M/M. U.K. 4Q GDP is expected to slow to 0.8% Y/Y, while December industrial and manufacturing production are forecasted to rebound to 0.3% and 0.4% M/M respectively.
  • Asia: Japan producer prices should increase to 1.5% Y/Y for January with machine tool orders scheduled for release on Wednesday. China consumer inflation rose for January to 5.4% Y/Y, while producer prices increased to 0.1% Y/Y. January credit data along with money supply for China are scheduled for release. Many economic activities in China remain shut due to coronavirus precautions.
  • Central Banks: The central banks of New Zealand, Sweden, Belarus, Serbia, Mexico, Peru, Uganda meet with Mexico expected to cut monetary policy rates.

  WEEK IN REVIEW

  • Stocks posted the best week since June 2019 and closed +3.2% higher while reaching a new all-time high during the week. Earnings and better than expected economic data such as U.S. ISM and job growth helped ignite the rally. Information technology (+4.5%), materials (+4.2%) and healthcare (+3.9%) outperformed the S&P 500, while utilities (-0.6%), energy (+0.8%) and real estate (+1.7%) were the biggest laggards. WTI (-2.4%) and Brent (-6.3%) crude oil prices were down for the week, impacting the energy sector (+0.8%) and MLPs (-1.4%). Small cap stocks underperformed the S&P 500 with the Russell 2000 up +2.7%. The 10-year U.S. Treasury yield ticked up to 1.58%. High yield credit spreads narrowed, reflecting increased risk appetite.
  • The U.S. dollar was stronger against both developed market currencies and emerging market currencies. Developed international stocks as measured by MSCI EAFE underperformed the S&P 500 returns in both U.S. dollar terms (+1.8%) and on a hedged-currency basis (+3.0%). Emerging market stocks underperformed the S&P 500 with the non-hedged return of +2.8% for MSCI EM.
  • The 10-2 yield curve flattened to +18 basis points. Another curve measure of three-month yield six quarters forward – three-month yield became less inverted and closed the week at -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 use 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 reflecting that the market has begun to price in a possible insurance rate cut in the coming months in response to the economic dislocation from the coronavirus. Our view remains that the Federal Reserve is likely on hold for the time being and the odds of a recession over the next twelve months remain well 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. ©2020 Avalon Investment & Advisory. All rights reserved.

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Quarterly and Monthly Notes

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2019

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Third Quarter, 2019

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Third Quarter, 2018

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Second Quarter, 2018

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May 2018

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April 2018

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First Quarter,  2018

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February 2018

Yearly Outlook

2018

Monthly Note

November 2017

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Third Quarter,  2017

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August 2017

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July 2017

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Second Quarter,  2017

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May 2017

Monthly Note

April 2017

Quarterly Note

First Quarter, 2017

Monthly Note

February 2017

Monthly Note

January 2017

News | Press

Avalon Advisors, LLC Announces new Co-Chief Investment Officer

October 2, 2018

Avalon Advisors, LLC Named to 2018 Financial Times 300 Top Registered Investment Advisers

June 28, 2018

Avalon Advisors Announces San Antonio Expansion

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