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Perspectives from Above the Noise -- Week of January 14th, 2019

Perspectives from Above the Noise -- Week of January 14th, 2019

January 14, 2019
Stocks Advance as Trade Fears Ease

January 7-11, 2019 Recap

Trade Tensions Ease. U.S. stocks edged lower on Friday amid jitters over the partial government shutdown that stretched into its 21st day, matching the record for the longest such period. Yet the S&P 500 capped a third weekly gain, its longest winning streak since August and best overall performance since early 2016. Stocks advanced last week on progress in U.S.-China trade talks and Fed Chairman Powell reiterated the central bank can be patient in assessing economic data before making further rate hikes.

Weekly Performance. For the week, the S&P 500 gained 2.58%, the Dow Industrials rose 2.40% and the tech-heavy Nasdaq Composite advanced 3.45%. Since its 2018 year-low on December 24, the S&P 500 has rallied 10.54%.

Headline Inflation Cools. The consumer price index (CPI) fell 0.1% in December, its first decline in nine months, with year-over-year (YoY) prices cooling to 1.9% from 2.2%. The core CPI, which excludes volatile food and energy prices, held steady with readings matching prior monthly and YoY gains.

Industrials Perform Best. All 11 major sector groups posted gains last week, with Industrials (+4.09%), Real Estate (+3.98%) and Consumer Discretionary (+3.74%) rising the most. Defensive-oriented sectors gained the least, including Consumer Staples (+0.65%) and Utilities (+0.84%).

Treasurys Edge Lower. Treasury securities eased last week, sending the yield on benchmark 10-year notes up 3.3 basis points to 2.702%. The U.S. Dollar Index weakened by 0.53% last week. Meanwhile, U.S. WTI crude oil surged by 7.57% during the week, ending at $51.59/barrel.

What We’re Reading

Oil Rebounds Second Week

Shutdown Stretches to 24 Days

China’s Global Exports Cool

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Week’s Economic Calendar

Monday, January 14: Postponed: Trade Deficit, Business Inventories, New Home Sales, Durable Goods Orders;

Tuesday, January 15: Empire Manufacturing, Producer Prices;

Wednesday, January 16: Retail Sales, Import & Export Prices, Business Inventories, Beige Book Conditions;

Thursday, January 17: Jobless Claims, Housing Starts, Philadelphia Fed Business Manufacturing Outlook;

Friday, January 18: Industrial Production, Consumer Sentiment.

 Market Watch
Dow Jones2.40%2.87%-4.22%2.87%-6.18%
S&P 5002.58%3.63%-4.34%3.63%-4.34%
Russell 30002.94%4.12%-4.35%4.12%-4.69%
MSCI EAFE2.89%3.90%-3.17%3.90%-13.08%
MSCI Emerging Markets3.76%3.70%5.27%3.70%-14.30%
Barclays Agg Bond-0.04%0.18%2.28%0.18%0.66%
Barclays Municipal-0.02%0.32%2.82%0.32%2.04%
Barclays US Corp High Yield1.89%3.13%-0.51%3.13%0.30%
Bloomberg Commodity1.74%3.92%-6.73%3.92%-7.97%
S&P GSCI Crude Oil8.10%14.17%-26.78%14.17%-18.63%
S&P GSCI Gold0.70%1.05%5.47%1.05%-2.38%
Source: Morningstar
Chart of the Week
Valuation Peaked in January 2018
View larger image »

Stock performance was negative for the major equity indexes in 2018. At the same time, earnings growth was strong. The S&P 500 total return was -4.3% last year and earnings growth reached 20% annualized through the third quarter. There were double digit price declines in 2018 for U.S. small cap, international developed, and emerging market equities. Positively, the combination of strong earnings growth and lower stock prices has dropped valuations to below-average levels for most major equity categories. Valuation levels peaked this cycle in January 2018 and trended lower throughout the year. U.S. large cap equities entered 2019 slightly below their 15-year average price-to-earnings (P/E) ratio. However, U.S. large cap value, U.S. small cap, International Developed, and Emerging Market equities are all still at a deep discount versus their 15-year P/E averages. Valuations were a headwind for stocks in 2018, but could be a tailwind this year if earnings growth remains positive.

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The Bloomberg Barclays US Aggregate Bond Index, which was originally called the Lehman Aggregate Bond Index, is a broad based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government–related and corporate debt securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency) debt securities that are rated at least Baa3 by Moody’s and BBB- by S&P. Taxable municipals, including Build America bonds and a small amount of foreign bonds traded in U.S. markets are also included. Eligible bonds must have at least one year until final maturity, but in practice the index holdings has a fluctuating average life of around 8.25 years. This total return index, created in 1986 with history backfilled to January 1, 1976, is unhedged and rebalances monthly.

The Bloomberg Barclays US Corporate High Yield Index measures the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch, and S&P is Ba1/BB+/BB+ or below, excluding emerging market debt. Payment-in-kind and bonds with predetermined step-up coupon provisions are also included. Eligible securities must have at least one year until final maturity, but in practice the index holdings has a fluctuating average life of around 6.3 years. This total return unhedged index was created in 1986, with history backfilled to July 1, 1983 and rebalances monthly.

The Bloomberg Barclays US Municipal Bond Index covers the USD-denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds. Many of the subindicies of the Municipal Index have historical data to January 1980. In addition, several subindicies based on maturity and revenue source have been created, some with inception dates after January 1980, but no later than July 1, 1993. Eligible securities must be rated investment grade (Baa3/BBB- or higher) by Moody’s and S&P and have at least one year until final maturity, but in practice the index holdings has a fluctuating average life of around 12.8 years. This total return index is unhedged and rebalances monthly.

The Bloomberg Commodity Index is a broadly diversified index that measures 22 exchange-traded futures on physical commodities in five groups (energy, agriculture, industrial metals, precious metals, and livestock), which are weighted to account for economic significance and market liquidity. No single commodity can comprise less than 2% or more than 15% of the index; and no group can represent more than 33% of the index. However, between rebalancings, group weightings may fluctuate to levels outside the limits. The index rebalances annually, weighted 2/3 by trading volume and 1/3 by world production.

The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Introduced in 1993, the VIX Index has been considered by many to be the world's premier barometer of investor sentiment and market volatility.

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ.

The MSCI All-Country World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The SMCI ACWI consists of 46 country indexes comprising 23 developed and 23 emerging market country indexes. The developed country indexes include: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the Uninted States. The emerging market country indexes included are: Brazil, Chile, China, Colombia, Czech Republic, Eygpt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.

The MSCI EAFE Index is designed to measure the equity market performance of developed markets (Europe, Australasia, Far East) excluding the U.S. and Canada. The Index is market-capitalization weighted.

The MSCI Emerging Markets Index is designed to measure equity market performance in global emerging markets. It is a float-adjusted market capitalization index.

The MSCI Europe Index is a free float-adjusted market capitalization index that is designed to measure developed market equity performance in Europe.

The MSCI Pacific Index captures large and mid-cap representation across five Developed Markets (DM) countries in the Pacific region. With 470 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

The NASDAQ Composite Index includes all domestic and international based common type stocks listed on The NASDAQ Stock Market. The NASDAQ Composite Index is a broad based index.

The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe and is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

The Russell 3000 Index measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market.

The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe and is a subset of the Russell 1000 Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership. The Russell Midcap represents approximately 31% of the total market capitalization of the Russell 1000 companies.

The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry grouping (among other factors) designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe.

The S&P GSCI Crude Oil Indexis a sub-index of the S&P GSCI, provides investors with a reliable and publicly available benchmark for investment performance in the crude oil market.

The S&P GSCI Gold Index a sub-index of the S&P GSCI, provides investors with a reliable and publicly available benchmark tracking the COMEX gold futures market.

West Texas Intermediate (WTI) is a crude oil stream produced in Texas and southern Oklahoma which serves as a reference or "marker" for pricing a number of other crude streams. WTI is the underlying commodity of the New York Mercantile Exchange's oil futures contracts.

The U.S. Dollar Index is a weighted geometric mean that provides a value measure of the United States dollar relative to a basket of major foreign currencies. The index, often carrying a USDX or DXY moniker, started in March 1973, beginning with a value of the U.S. Dollar Index at 100.000. It has since reached a February 1985 high of 164.720, and has been as low as 70.698 in March 2008.