Stocks Commentary
Previous

Stocks: Riding The Storm Out

July 2018

After displaying amazing resiliency through most of June, domestic equities sold-off late in the month amid ongoing trade rancor, another rate hike out of the Federal Open Market Committee (FOMC), and quarter-end portfolio rebalancing. The S&P 500 eked out a 0.48 percent return for the month, while the small-cap Russell 2000 did a bit better, posting a 0.58 percent return. Abroad, the MSCI All Country World (ACWI) ex US Index fell 1.88 percent and the MSCI Emerging Markets Index really took it on the chin, declining 4.57 percent. It’s notable that the U.S. Dollar Index (DXY) rose around half of one percent during the month, so steep declines in foreign equity markets have likely been derived predominately from capital flows into U.S. assets, specifically Treasury bonds and money markets, amid this ongoing geopolitical uncertainty.

For the first time since the 2007-2009 Financial Crisis, cash appears to be a palatable alternative for investors looking to get away from the fray. Prior to the past few months, investor preference would likely have been to move into high yield bonds or even longer-dated Treasury bonds, but with the Fed funds rate climbing higher and the spread between the yield on 2-year and 10-year U.S. Treasury bonds compressing down to a cycle-low of 33 basis points, and with inflation showing nascent signs of life, investors aren’t being properly incentivized to take on interest rate risk at the present time. The trailing 12-month yield on the S&P 500 is 1.93 percent; the current 2-year U.S. Treasury bond yield is 2.52 percent, and the 10-year U.S. Treasury yield sits at 2.85 percent. Not much of a competition between short-term bonds and stocks - if income and preserving purchasing power is your aim anyway.

Investors seeking to deploy capital into assets positively correlated to what looks and feels like a robust U.S. economic backdrop, i.e. stocks, are facing a dilemma unlike any other over the past decade. The revenue hit that multinational U.S. companies could potentially take should a protracted trade war materialize could be substantial and should not be underestimated, but it’s also difficult to handicap negotiations as an about-face could easily turn the tide in a less detrimental direction. It’s also difficult to ignore the relative attractiveness of clipping a 2.5 percent coupon from a 2-year U.S. Treasury bond while waiting for the trade dust to settle.

With the FOMC poised to pull short-term interest rates higher still over the coming quarters, expected returns on short-term Treasuries will rise, bolstering their appeal and providing greater competition for higher yielding equities. When looking to add exposure to risk assets, investors have shifted capital into domestically-focused small-cap stocks, providing desired exposure to the U.S. economy while leaving them potentially less susceptible to the international brouhaha. Small-caps will likely continue to garner investor capital over the coming months as rising short-term rates amid robust U.S. economic growth should lead to continued U.S. dollar strength, a positive backdrop, relatively speaking anyway, for domestically-focused companies.

2nd quarter earnings season begins in earnest over the coming weeks, with the consensus estimate projecting 20 percent year-over-year earnings per share (EPS) growth. With EPS expectations lofty, forward guidance and C-suite confidence, or the lack thereof, will tell the tale. A crisis of confidence from those with “Chief” in their title on earnings calls would weigh on capital expenditure plans and on expectations for share buybacks and dividend hikes. It will be worth monitoring those companies choosing to take the easy way out by lowering earnings guidance citing trade-related concerns as it’s far too early to place the blame for a future earnings shortfall squarely on the shoulders of trade. Investors will respond with their capital, penalizing those unjustifiably lowering guidance.

Source: Bloomberg

Next

On a scale from 1 to 5, with 1 being 'Not Good' and 5 being 'Excellent', how would you rate this article?

Press enter to submit your rating

Rate this Article

Use this form to provide additional feedback based on the rating you provided.

Thanks for Rating

Would you like to provide feedback?

Thanks for your feedback!

The content and any portion of this newsletter is for personal use only and may not be reprinted, sold or redistributed without the written consent of Regions Bank. Re¬gions, the Regions logo and other Regions marks are trademarks of Regions Bank. The names and marks of other companies or their services or products may be the trademarks of their owners and are used only to identify such companies or their services or products and not to indicate endorsement or sponsorship of Regions or its services or products. The information and material contained herein is provided solely for general information purposes. Regions does not make any warranty or representation relating to the accuracy, completeness, or timeliness of any information contained in the newsletter and shall not be liable for any damages of any kind relating to such information nor as to the legal, regulatory, financial or tax implications of the matters referred herein. This material is not intended to be investment advice nor is this information intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only current as of the stated date of their issue. Regions Wealth Management is a business group within Regions Bank that provides investment, administrative and trustee services to customers of Regions Bank.

Neither Regions Bank nor Regions Institutional Services (collectively, “Regions”) are registered municipal advisors nor provide advice to municipal entities or obligated persons with respect to municipal financial products or the issuance of municipal securities (including regarding the structure, timing, terms and similar matters concerning municipal financial products or municipal securities issuances) or engage in the solicitation of municipal entities or obligated persons for such services. With respect to this presentation and any other information, materials or communications provided by Regions, (a) Regions is not recommending an action to any municipal entity or obligated person, (b) Regions is not acting as an advisor to any municipal entity or obligated person and does not owe a fiduciary duty pursuant to Section 15B of the Securities Exchange Act of 1934 to any municipal entity or obligated person with respect to such presentation, information, materials or communications, (c) Regions is acting for its own interests, and (d) you should discuss this presentation and any such other information, materials or communications with any and all internal and external advisors and experts that you deem appropriate before acting on this presentation or any such other information, materials or communications.

Employees of Regions Asset Management may have positions in securities or their derivatives that may be mentioned in this report or in their personal accounts. Additionally, affiliated companies may hold positions in the mentioned companies in their portfolios or strategies. The companies mentioned specifically are sample companies, noted for illustrative purposes only. The mention of the companies should not be construed as a recommendation to buy, hold or sell positions in your investment portfolio.

This communication is provided for educational and general marketing purposes only and should not be construed as a recommendation or suggestion as to the advisability of acquiring, holding or disposing of a particular investment, nor should it be construed as a suggestion or indication that the particular investment or investment course of action described herein is appropriate for any specific retirement investor. In providing this communication, Regions is not undertaking to provide impartial investment advice or to give advice in a fiduciary capacity.

*Investment, Annuities and Insurance Products

  • Are Not FDIC Insured
  • Are Not Bank Guaranteed
  • May Lose Value
  • Are Not Deposits
  • Are Not Insured by Any Federal Government Agency
  • Are Not a Condition of Any Banking Activity