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 as of July 22, 2019

Chart of the Week: This week brings a look at the current state of the global economy via July PMI data from the U.S., Eurozone and Japan. China reports July PMI next week. Currently, the manufacturing component for Japan, China and Eurozone are below the 50 level which is considered the line of demarcation between growth and contraction (see chart). U.S. manufacturing PMI is also very correlated with corporate profits. Consensus expects a small pickup in the U.S. reading for July. The Eurozone is expected to remain flat but see a small improvement in the important German reading. The downward trend in the PMI data also help make the case for why the Fed will cut rates by at least 25 basis points at the July 31 meeting. While the data is not indicating an imminent U.S. recession, the Fed is likely to position this July cut as “insurance” against the global slowdown and persistently low inflation. In addition, the European Central Bank (ECB) meets this week and at the minimum the stage will be set for future policy easing in terms of additional rate cuts likely at their September meeting and eventually asset purchases. If the global easing cycle can reflate the global economy again, asset prices should benefit.

  WEEK IN PREVIEW

  • Geopolitical: Markets will continue to monitor the progress of trade negotiations between the U.S. and China. Escalating global tensions with Iran will be in the spotlight. The International Monetary Fund provides its World Economic Outlook update.
  • U.S.: 2Q GDP is expected to slow to 1.8% from the prior quarter’s 3.1% and the slowest pace since 1Q 2017. June housing data on tap with existing home sales forecast to decline slightly while new home sales should rise 5.4% month-over-month. Headline durable goods orders for June should rebound from the decline in May. 2Q GDP estimates from the Atlanta and NY Fed are 1.61% and 1.41%, respectively. Please see the Chart of the Week for more about the July PMI data.
  • S&P 500 2Q Earnings: 16% of S&P 500 companies have reported so far with 79% and 62% beating earnings and sales estimates respectively. 2Q earnings declines improved to -1.9% year-over-year (Y/Y) from -3.0% the previous week. The improvements were primarily driven by better earnings from financials and technology. Among the 144 S&P 500 companies reporting this week: TXN, KO, BA, CAT, FB, GOOGL, AMZN, INTC, SBUX, TWTR, MCD.
  • Europe: July Eurozone consumer confidence is expected to hold steady with June at -7.2. The German IFO expectations reading is forecast to decline slightly to 94.0 from 94.2. The European Central Bank meets and is expected to set the groundwork for more future easing via a rate cut and a tiering system with additional eventual asset purchases if needed. The U.K. is expected to announce a new Prime Minister on July 23, likely Boris Johnson, to replace Theresa May with about three months remaining until the October 31 Brexit deadline.
  • Asia: Japan releases Y/Y nationwide department store sales for June. China has June industrial profits which were 1.1% Y/Y in May.
  • Central Banks: In addition to the ECB, the central banks of Hungary, Nigeria, Kenya, Georgia, Turkey, Russia, Angola and Colombia meet with both Turkey and Russia expected to cut rates. The global central bank easing cycle remains in effect with the U.S. Fed almost sure to ease at the end of the month.

  WEEK IN REVIEW

  • The S&P 500 declined by -1.2% after reaching another record high early in the week. Consumer staples (0.2%), materials (0.2%) and utilities (-0.4%) outperformed the S&P 500 the most; while communication services (-3.1%), energy (-2.7%), and real estate (-2.3%) were the laggards. WTI (-7.6%) and Brent crude (-6.4%) prices were down sharply for the week, impacting the energy sector’s performance. However, MLPs were only down -1.4%. Small cap stocks underperformed with the Russell 2000 down -1.4%. The 10-year U.S. Treasury yield declined to 2.06%. High yield credit spreads reflected decreased risk appetite by widening.
  • The U.S. dollar was slightly stronger against developed market currencies and weaker against emerging market currencies. Developed international stocks as measured by MSCI EAFE outperformed the S&P 500 returns in both the U.S. dollar terms (-0.13%) and on a hedged-currency basis (-0.12%). Emerging market stocks outperformed the U.S. with the non-hedged return of 0.6% for MSCI EM.
  • The 10-2 yield curve flattened slightly and ended at 23 basis points. Another curve measure of three-month yield six quarters forward – three-month yield was inverted less and ended the week at -37 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 a year or more 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 about two net cuts in short-term rates over the next year and a half. Our view remains that the odds of a recession in 2019 remain low and Avalon expects two rate cuts from the Federal Reserve in 2019. 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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