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 September 23, 2019

Chart of the Week: With the global economy still slowing, why is the market close to all-time highs? One clue could be the Bloomberg U.S. economic surprise index has turned higher, meaning that economic data are being reported better than consensus expectations. The greatest strength of surprises is coming from the consumer and housing. Manufacturing is still a drag but has been less disappointing. In addition, the global central banks are aggressively easing to offset the trade drag. The Fed cut rates last week and left the door open to more easing if needed. The European Central Bank recently began open-ended asset purchases. Markets continue to be heavily impacted by trade headlines. When the Chinese delegation left without their planned farm tour last week, stocks declined on the news. Further disruption of Saudi oil supply also remains a risk for markets. Investors should be prepared for further volatility, but U.S. recession risks have declined, and central bank policies are risk asset friendly.

  WEEK IN PREVIEW

  • Geopolitical: Markets will monitor the progress of trade negotiations between the U.S. and China after the Chinese delegation cut their visit short last week. Movement of the Yuan/U.S. dollar, tweets and the expected October face-to-face trade talks in DC will be closely watched for any signs of deterioration or improvement. Developments in the Middle East and the pace of oil production recovery will be monitored following the attacks on Saudi oil facilities. The United Nations meets with Iran, climate change and trade among the likely issues.
  • U.S.: September Markit PMI readings for manufacturing and services are expected to improve slightly to 50.4 and 51.5 respectively. New and pending home sales should improve for August. Third reading of 2Q GDP expected to be unchanged at 2.0%. Personal income for August should accelerate while spending decelerates. August durable goods orders excluding transportation are forecast to rebound. NKE and MU are among companies reporting earnings. The Atlanta and NY Fed currently estimate 3Q GDP growth at 1.94% and 2.24%, respectively. At least twelve speeches from Fed officials are on tap following the 25 basis point rate cut last week.
  • Europe: Eurozone Markit PMI readings for September were reported at 45.6 for manufacturing and 52.0 for services.  Eurozone manufacturing continues to be in contraction with the reading below 50 and German manufacturing readings weighing on results at 41.4. Brexit daily technical discussions begin with hopes of a solution before the Oct. 31 Brexit deadline. The U.K Supreme Court may rule on the legality of PM Johnson’s suspension of Parliament.
  • Asia: Quiet week for Asian data, but Japan September PMI data will give a glimpse of the strength of the economy. Japan August machine tool orders final updates the -37.1% year-over-year previously reported. China August industrial profits expected.
  • Central Banks: The central banks of Kenya, Colombia, Hungary, New Zealand, Morocco, Thailand, Czech Republic, Guatemala, Georgia, the Philippines, Mexico, Egypt, Angola, Trinidad and Tobago will meet with the Philippines, Mexico and Egypt expected to cut rates. Avalon expects the global central banks will continue to ease policy to offset the trade drag

  WEEK IN REVIEW

  • The S&P 500 corrected -0.5% after the recent rally. Utilities (+2.2%), real estate (+2.1%) and healthcare (+1%) were the best performing sectors, while consumer discretionary (-2.2%), industrial (-1.5%) and financials (-1.0%) were the laggards. WTI (+5.9%) and Brent crude (+6.7%) oil prices rebounded for the week, helping the energy sector (+1%) and MLPs (+1.2%). Small cap stocks underperformed with the Russell 2000 down -1.2%. The 10-year U.S. Treasury yield declined to 1.7%. High yield credit spreads narrowed fractionally, reflecting increased risk appetite but at odds with the stock declines.
  • The U.S. dollar was stronger against both developed currencies and emerging market currencies. Developed international stocks as measured by MSCI EAFE outperformed the S&P 500 returns in both U.S. dollar terms (-0.4%) and on a hedged-currency basis (-0.02%). Emerging market stocks kept pace with the U.S. with the non-hedged return of -0.5% for MSCI EM.
  • The 10-2 yield curve narrowed to +3.2 basis points. Another curve measure of three-month yield six quarters forward – three-month yield became more inverted and ended the week at -35.0 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 only one net cut in short-term rates over the next year and a half. Our view remains that the odds of a recession over the next twelve months remain low and Avalon expects as much as one additional rate cut of 0.25% from the Federal Reserve in 2019. Avalon continues to monitor the data closely. Please see our Avalon Perspectives publication, http://avalonadvisors.com/yield-curve.html, 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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