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, Haver, Centers for Disease Control and Prevention as of February 3, 2020

Chart of the Week:  The continued spread of the coronavirus (2019-nCoV) from China sent markets lower last week, despite some very strong earnings reports. Just as the European and Chinese economies seemed to be finding a bottom, the 2019-nCoV outbreak will certainly dent 1Q U.S. and global GDP growth. History indicates that the impact is likely to be transitory with a quick rebound (see chart). Economic activity in China, especially services and travel, have already been severely impacted during the busy Lunar New Year holiday. Even good economic data reported this week will be looked at with a jaundiced eye given the future impact of the virus. Overly optimistic investor sentiment in January likely exacerbated the negative impact of the 2019-nCoV on stocks but the virus is not likely to change the positive trend in stocks or the economy.

  WEEK IN PREVIEW

  • Geopolitical: The U.S. Senate impeachment trial of President Trump continues with final arguments and debate before the likely acquittal vote at 4 pm ET on Wednesday. The 2020 Democratic nomination contest begins with the Iowa caucus on Monday. President Trump delivers his 2020 State of the Union address. Trading in mainland China resumed Monday after the Lunar New Year holiday with the specter of the coronavirus sending shares sharply lower.
  • U.S.: The January ISM Manufacturing reading is expected to improve to 48.5 from 47.2, while ISM Non-Manufacturing should rise to 55.1 from 54.9. The labor market is likely to remain solid with non-farm payrolls growing 160k and the unemployment rate remaining at 3.5%. The Atlanta and NY Fed currently estimate 1Q 2020 GDP growth at 2.74% and 1.55% respectively.
  • Q4 S&P 500 Earnings: The busy part of earnings season continues with 94 companies in the S&P 500 scheduled to report, including GOOGL, QCOM, MRK, BMY, DIS, YUM and ABBV. With 45% of companies reporting, 69% and 65% exceeded earnings and sales estimates respectively. Blended earnings expectations for Q4 improved to -0.3% year-over-year (Y/Y) from  1.9% and sales improved to 3.1% Y/Y from 2.9%. The technology sector, primarily due to Microsoft and Apple, and the consumer discretionary sector, compliments of Amazon, were the main drivers for the large earnings improvement. 2020 earnings estimates are at 9.1% Y/Y.
  • Europe: December Eurozone retail sales expected at 2.3% Y/Y. German December factory orders should decline at a  6.6% Y/Y pace. German December trade data is also on tap. The U.K. officially departed the European Union (E.U.) last week, so the work of signing new trade deals begins though the U.K. remains part of the E.U.’s single market and customs union through 2020.
  • Asia: Japan December household spending expected to improve to  1.6% Y/Y. January China Caixin manufacturing PMI fell to 51.1 from 51.5 and services PMI is expected to decline as well. China January trade data is also scheduled to be released.
  • Central Banks: The central banks of Kazakhstan, Australia, Thailand, Brazil, Poland, Iceland, India, the Philippines, Czech Republic, Russia and Romania meet with Brazil, the Philippines, and Russia expected to cut monetary policy rates.

  WEEK IN REVIEW

  • Stocks continued to experience turbulence as the coronavirus developments sent the S&P 500 -2.1% lower for the week. Utilities (+0.8%), consumer discretionary (+0.1%) and consumer staples (-0.8%) outperformed the S&P 500, while energy (-5.7%), materials (-3.5%) and healthcare (-3.3%) were the biggest laggards. WTI (-4.9%) and Brent (-4.2%) crude oil prices were down for the week, impacting the energy sector (-5.7%) and MLPs (-4.6%). Small cap stocks underperformed the S&P 500 with the Russell 2000 down -2.9%. The 10-year U.S. Treasury yield fell to 1.51%. High yield credit spreads widened, reflecting decreased risk appetite.
  • The U.S. dollar was weaker against developed market currencies and stronger against emerging market currencies. Developed international stocks as measured by MSCI EAFE underperformed the S&P 500 returns in both U.S. dollar terms (-2.5%) and on a hedged-currency basis (-2.9%). Emerging market stocks underperformed the S&P 500 with the non-hedged return of -5.1% for MSCI EM.
  • The 10-2 yield curve slightly steepened to +19 basis points. Another curve measure of three-month yield six quarters forward – three-month yield further inverted to -32 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 reflecting that the market has begun to price in a possible insurance rate cut over the next eighteen months in response to the economic dislocation from the coronavirus. 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 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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