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: Source: Bloomberg, Strategas Research Partners, Avalon Investment & Advisory as of September 30, 2019

Chart of the Week: With House Speaker Pelosi announcing an impeachment inquiry into President Trump, our assessment of past periods surrounding impeachment hearings indicates that while politics do matter, the economic backdrop is likely a more dominant factor. It is impossible to predict the outcome with any precision, but with the president’s political party controlling the Senate it will be a high hurdle to get the supermajority of two-thirds of Senators to find the president guilty. Though there are only two impeachments to analyze in the modern era, it seems that regardless of outcome the trends that were in place prior to any impeachment proceedings continued and markets were driven by other factors. With impeachment news likely to dominate headlines, investors should be prepared for volatility. The larger drivers of stocks are likely to continue to be trade conflicts along with economic and earnings growth.

  WEEK IN PREVIEW

  • Geopolitical: Markets will monitor the progress of trade negotiations between the U.S. and China after the news that the Trump administration is considering putting a limit on portfolio flows between the U.S. and China. Movement of the Yuan/U.S. dollar, tweets and the expected October 10-11 face-to-face trade talks in DC will be closely watched for any signs of deterioration or improvement. Germany celebrates reunification on October 3.
  • U.S.: ISM manufacturing for September expected to rebound to 50.1 from 49.1 while ISM non-manufacturing slows down to 55.0 from 56.4. September auto sales readings probably running at a 17 million rate. The jobs report is expected to show nonfarm payrolls rose to 145,000 from 130,000 in August, while unemployment stayed put at 3.7%. The Atlanta and NY Fed currently estimate 3Q GDP growth at 2.11% and 2.06%, respectively. Fed officials circle the globe to speak on monetary policy with at least 14 speeches on tap. The heart of 3Q earnings season is a couple of weeks away but PEP and COST are among the companies reporting.
  • Europe: German retail sales for August slowed to 3.2% year-over-year (Y/Y) with the Eurozone reading expected to slow to 2.0% Y/Y. September Eurozone consumer inflation expected to remain at 1.0% Y/Y. U.K. September Markit PMI readings should continue to reflect struggling manufacturing and construction activity. Many possible paths remain before the October 31 Brexit deadline including a possible extension.
  • Asia: 3Q Japanese Tankan readings expected to further deteriorate. Japan consumption tax increases to 10% from 8% on October 1. China September PMI data showed a slight improvement with the composite now at 53.1 up from 53.0. Chinese markets are closed for the week starting October 1 to celebrate The People’s Republic of China’s 70th anniversary.
  • Central Banks: The central banks of Angola, Bulgaria, Dominican Republic, Australia, Iceland, Romania, Poland, India will meet with Australia and India expected to cut rates. Avalon expects the global central banks will continue to ease policy to offset the trade drag on growth.

  WEEK IN REVIEW

  • The S&P 500 closed at -1.0%, a 3-week low as trade tensions and impeachment uncertainty rise. Utilities (+1.3%), consumer staples (+1.2%) and real estate (+0.2%) were the best performing sectors, while healthcare (-3.0%), energy (-2.6%) and communication services (-2.3%) were the laggards. WTI (-3.8%) and Brent crude (-3.7%) oil prices were lower for the week, weighing on the energy sector (-2.6%) and MLPs (-3.5%). Small cap stocks underperformed with the Russell 2000 down -2.5%. The 10-year U.S. Treasury yield declined to 1.68%. High yield credit spreads widened, reflecting lower risk appetite.
  • The U.S. dollar was stronger against developed currencies and slightly weaker against emerging market currencies. Developed international stocks as measured by MSCI EAFE outperformed the S&P 500 returns in both U.S. dollar terms (-0.9%) and on a hedged-currency basis (-0.2%). Emerging market stocks underperformed the S&P 500 with the non-hedged return of -1.9% for MSCI EM.
  • The 10-2 yield curve widened to +4.8 basis points. Another curve measure of three-month yield six quarters forward – three-month yield became less inverted and ended the week at -25.9 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, 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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