Record prices and peak valuations have raised concerns over the outlook for stocks. In our view the key takeaways are: 1) valuation often normalizes through earnings and time, not price corrections, 2) free cash flow yield is an increasingly important metric as companies move to capital-light models, 3) low interest rates strengthen the equity opportunity set, and consequently, 4) investors should emphasize bottom-up positioning over pure beta.
The S&P 500 found its 28th record high of 2019 last week on the back of renewed optimism around a phase one US-China trade deal. With reports that the two countries reached a deal to avoid new tariffs in exchange for purchases of American agricultural products, the S&P 500 rose 0.77% on the week. In the UK, the FTSE 100 jumped 1.59% on Brexit clarity after Prime Minister Boris Johnson’s Conservative party won a sizable majority, thus clearing the way for the UK to leave the European Union in January. The Euro Stoxx 600 rose 1.15%. Read More
Oil markets finished up last week as the potential for a global growth pickup outweighed supply concerns: the International Energy Agency predicted a sharp rise in global inventories while the US Energy Information Administration reported declining winter demand. WTI and Brent Crude prices rose 1.47% and 1.29%, respectively. Read More
Global sovereign debt had a mixed week amid progress towards the resolution of headline geopolitical issues. In the UK, 10-year Gilt yields rose to 0.79% on Brexit optimism following the UK general election. In the US, 2-year and 10-year Treasury yields ended 2 basis points (bps) and 4 bps lower respectively, as the Fed signal for a pause on rates was compounded by lingering uncertainties around the phase one trade deal. Read More
The US dollar fell 0.62% against a basket of its peers last week, touching a four-month low after the Fed held interest rates steady last Wednesday. In the UK, the pound saw some volatility around the general election, surging over 2% against the US dollar after exit polls showed the Conservative party winning a large majority in Parliament. The pound pared its steep gains to end at $1.3340. Read More
The FOMC held its target policy rate at 1.50%-1.75%. Fed officials presented a supportive economic backdrop, citing a healthy labor market, accommodative policy, and lack of persistent inflation. Officials provided future policy expectations: no hikes in 2020, and one hike both in 2021 and 2022. For the ECB, President Lagarde sent a balanced message in her first press conference. She noted increased confidence in the growth outlook but pointed to slow progress on inflation and signaled continuity on monetary policy, providing a broadly favorable assessment of negative rates. Read More
The Conservative party won a comfortable majority in UK Parliamentary elections, all but ensuring that Prime Minister Johnson’s Brexit deal will be ratified before the current Article 50 deadline expires on January 31, 2020. Although the Conservative party manifesto states that the UK will seek to agree to a new trade arrangement with the EU during the transition period, we think it is plausible for the transition period to be extended beyond December 2020 to allow for additional negotiation time. We continue to expect unchanged Bank of England policy next year. Read More
For style performance, Large, Mid, and Small refer to the Russell 1000, Russell Midcap, and Russell 2000 indices, respectively. Value refers to companies with lower price-to-book ratios and lower expected growth values, and Growth refers to higher price-to-book ratios and higher forecasted growth values. Government, Corporate, and High Yield refer to the US Treasury index, the US Corporate Credit index, and the US High Yield index, respectively. Short, Intermediate, and Long refer to the Short, Intermediate, and Long segments of their respective curves. Quality returns refers to the credit quality of asset classes ranging from Government, highest quality, to High Yield, lowest quality.
US Markit Manuf. PMI (Cons: 52.6, Prior: 52.6)
Euro Area Manuf. PMI (Cons: 47.3, Prior: 46.9)
UK Manuf. PMI (Cons: 49.5, Prior: 49.3)
US IP (Cons: 0.8%, Prior: -0.8%)
UK CPI MoM (Cons: 0.2%, Prior: -0.2%)
BoE Bank Rate (Cons: 0.75%, Prior: 0.75%)
“Euro PMI” refers to the Markit Eurozone Composite Purchasing Managers’ Index. “Cons. Conf.” refers to US Consumer Confidence. “GE IFO Business” refers to the German Ifo Business Climate Survey. “New Home Sales” refers to US New Home Sales (MoM). “Dur. Gd. Ord.” refers to US Durable Goods Orders. “UK GDP” refers to the QoQ estimate of the United Kingdom’s Gross Domestic Product for Q3. “Euro M3” refers to the YoY change in the Eurozone’s M3 Money Stock. “US GDP” refers to the estimate of US Gross Domestic Product for Q3. “Pers. Cons.” refers to US Personal Consumption. “UMich Cons. Sent.” refers to the University of Michigan Consumer Sentiment Index. “Japan Core-Core CPI” refers to Japan’s Consumer Price Index (ex- Food, Energy YoY).
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