Weekly RecapFor the week ending January 17, 2020

Ryan NaumanMarket StrategistInforma Financial IntelligenceRyan.Nauman@Informais.com

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Sources: Zephyr StyleADVISOR, MacroBond, PSN Enterprise, Bloomberg. 1 week data as of 1/17/20, unless otherwise stated, time periods over 1 week as of 12/31/19. Equity Style Performance represented by: Large Value – Russell 1000 Value, Large Blend – Russell 1000, Large Growth – Russell 1000 Growth, Mid Value – Russell MidCap Value, Mid Blend – Russell MidCap, Mid Growth – Russell MidCap Growth, Small Value – Russell 2000 Value, Small Blend – Russell 2000, Small Growth – Russell 2000 Growth. Fund flow data (EPFR Global) 1/9/20 –1/15/20, S&P 500 (Large Cap Blend flows), Russell 3000 (all U.S. equity flows), Russell 1000 (all Large Cap flows), Russell Mid Cap (all Mid Cap flows), Russell 2000 (all Small Cap flows), MSCI EAFE (Western Europe DM, Asia Pacific DM flows) MSCI EM (All Emerging Market flows), MSCI World (All Developed Markets flows)

Global Asset Class Performance

Index 1 Week 3-Mos YTD 1 Year 3 Year Flows (mil)S&P 500 1.99% 9.07% 31.49% 31.49% 15.27% $1,119

Russell 3000 2.04% 9.10% 31.02% 31.02% 14.57% ($1,611)

Russell 1000 2.00% 9.04% 31.43% 31.43% 15.05% $130

Russell MidCap 2.29% 7.06% 30.54% 30.54% 12.06% ($718)

Russell 2000 2.54% 9.94% 25.53% 25.53% 8.59% ($895)

MSCI EAFE 0.86% 8.21% 22.66% 22.66% 10.11% $4,226

MSCI EM 1.17% 11.93% 18.90% 18.90% 11.99% $3,874

MSCI World 1.61% 8.68% 28.40% 28.40% 13.20% $8,672

1 Mos Value Blend GrowthLarge 2.75% 2.89% 3.02%

Mid 3.04% 2.29% 1.17%

Small 3.50% 2.88% 2.29%

YTD Value Blend Growth

Large 26.54% 31.43% 36.39%

Mid 27.06% 30.54% 35.47%

Small 22.39% 25.53% 28.48%

Factor Index 3 Mos YTD 1 YR Risk-Adj %

MSCI USA Small Cap 8.67% 27.38% 21.00%

MSCI USA Value 7.39% 25.73% 25.63%

MSCI USA Minimum Volatility 3.07% 27.96% 52.46%

MSCI USA Momentum 5.89% 28.09% 39.77%

MSCI USA Quality 11.47% 39.11% 37.41%

MSCI USA Dividend Tilt 7.75% 28.80% 30.69%

Index 1 Week 3-Mos YTD 1 Year 3 Year YieldBloomberg Barclays US Aggregate 0.06% 0.18% 8.72% 8.72% 4.03% 2.26

Bloomberg Barclays US High Yield 0.27% 2.61% 14.32% 14.32% 6.37% 5.99Bloomberg Barclays Municipals 10 Yr 0.39% 0.79% 7.70% 7.70% 4.95% 1.44%

Major Equity Asset Class Performance Equity Style Performance Equity Factor Performance

1/17/20 1/10/20 12/31/19 12/31/19 1/17/19 1/17/172-yr U.S. Treasuries 1.58 1.56 1.58 1.58 2.56 1.1710-yr U.S. Treasuries 1.84 1.83 1.92 1.92 2.75 2.3330-yr U.S. Treasuries 2.29 2.28 2.39 2.39 3.07 2.9310-yr German -0.23 -0.20 -0.19 -0.19 0.20 0.2510-yr Japan -0.01 -0.01 -0.03 -0.03 -0.01 0.0510-yr U.K. 0.56 0.70 0.74 0.74 1.33 1.30

Major Equity Asset Class Performance

Rates

Chart of the Week: Major Equity Sector Q4 2019 Performance Zephyr StyleADVISOR Zephyr Associates

100

102

104

106

108

110

112

Sep 2019 Oct 2019 Nov 2019 Dec 2019

MSCI EM (EMERGING MARKETS)Russell 2000Russell 1000MSCI World IndexMSCI EAFE IndexRussell Midcap

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ThemeEconomic Data

The consumer price index increased 0.2% in December, while the cost of living in the past 12 months rose to 2.3%, marking the largest annual advance since October 2018. Meanwhile, the core rate of inflation rose 0.1% in December and 2.3% over the past 12 months.

The producer price index (PPI) rose 0.1% in December, while wholesale inflation increased 1.3% in 2019. Additionally, the core PPI rose 0.1% in December while the 12-month core PPI increased 1.5%.

The Empire State business conditions index increased 1.5 points to 4.8 in January. Additionally, the Philadelphia Fed manufacturing index jumped to 17 in January from 2.4 in December.

Retail sales increased 0.3% in December while sales increased a healthy 5.8% for all of 2019.

The NAHB Home Builders’ confidence index fell slightly to 75 in January from 76 in December.

Industrial production fell 0.3% in December, marking the third decline in the past four months. For the fourth quarter industrial production was down at an 0.5% annual rate. Meanwhile, capacity utilization fell to 77% in December.

The University of Michigan consumer sentiment index declined to 99.1 in January from 99.3 in December. Meanwhile, the NFIB small-business optimism index fell to 102.7 in December from 104.7 in November.

Job openings fell to 6.8 million in December from 7.36 million in November. The December level marks a 21-month low.

Earnings Below are some of the headline beats, misses, and mixed results from the week. Beat earnings and revenue estimatesJ.P. Morgan Chase & Co., Delta Air Lines Inc., Citigroup Inc., Bank of America Corp., Morgan Stanley, State Street Corp. Mixed resultsUnitedHealth Group Inc., Goldman Sachs, PPG Industries Inc., Charles Schwab Corp. Missed earnings and revenue estimatesWells Fargo & Co.

Trade The S&P 500 index hit record highs after the U.S. and China officially signed the phase one trade deal. According to White House National Economic Council Director Larry Kudlow, the agreement increases Chinese purchases of U.S. agricultural, manufacturing, and other goods and services by $200 billion over two years and includes enforcement mechanisms. Though the deal cuts U.S. tariffs to 7.5% on around $120 billion in Chinese products, it keeps in place levies on some $380 billion of Chinese imports. Additionally, the Wall Street Journal reported that China has pledged to give U.S. companies greater access to its financial services sector; to refrain from devaluing the yuan; and to somewhat enhanced protection of U.S. intellectual property.

Key Themes – Equities Reach Record Highs During the Week on Solid Earnings Data and a Signed Phase One Trade Deal.

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Earnings Overall, expectations for the fourth quarter earnings season remain low, as most, including myself, are expecting the earnings recession to continue, with FactSet estimating earnings falling 2% during the fourth quarter. Despite thinking that the fourth quarter will mark the fourth straight quarter of year-over-year negative earnings growth, I believe this cycle will be a turning point for earnings, as the earnings recession will end after this cycle. I expect the first quarter of 2020 to mark the beginning of positive earnings growth as many corporations will benefit from low earnings in 2019 and the stabilizing global economy. Below are some noteworthy figures regarding the current fourth quarter earnings season.

As of Friday, January 17, 9% of the S&P 500 companies have reported fourth quarter earnings. 72% of the reporting companies beat earnings estimates, which equals the 5-year average, while 63% posted better-than-expected sales, which is above the 5-year average. Overall, earnings are 1.1% higher than estimates, which is below the five-year average. Currently, earnings growth is on pace to come in at -2.1%, which would mark the fourth straight quarter of negative earnings growth if it continues to remain negative. Additionally, revenue growth stands at 2.7%, which would mark the lowest growth rate since Q3 2016 (2.7%), if this rate stands for the entire quarter.

The solid market performance during the year has lifted valuations for the S&P 500 index. The current forward p/e ratio sits at 18.6, which is above the 5-year average of 16.7 and above the 10-year average of 14.9. Financials remain the most attractive sector in terms of forward p/e, coming in at 13.3, which is above the sector’s 5-year (12.9) and 10-year (12.3) averages.

To date, the blended profit margin for the fourth quarter is 10.7%, which if this continues will mark the first time the index has reported four straight quarters of year-over-year declines in net profit margin since Q4 2008 through Q3 2009. Profit margins for the S&P 500 companies remain under pressure as the year-over-year top line (revenue) growth for companies is 2.7% for the quarter, while the bottom line (earnings) year-over-year growth stands at -2.1%. At the sector level, only three of the eleven sectors are reporting a year-over-year gain in their net profit margins, led by financials (16.2% vs. 15.6%), utilities (9.8% vs. 9.0%), and materials (8.5% vs. 8.0%).

Furthermore, companies that generate over 50% of their sales outside the U.S. continue to struggle with a strong dollar, slow global growth, and trade tensions. These companies who rely more heavily on global sales have experienced earnings decline by -5.1%, while companies who generate more than 50% of their sales inside the U.S. have experienced earnings decline by -0.4%. (Earnings Data Source: FactSet)

More Work Needed

Well, we finally have a signed trade deal, albeit a very light agreement, but at this point something is better than nothing. There obviously is a lot of work to be done for a comprehensive deal to be completed, including more structure around intellectual property theft and structural reform. Despite the deal being skinny, it is a sign of progress and easing tensions between the two countries, which is a major step in the right direction.

The biggest takeaway from the phase one trade pact was the ability for the U.S. to get an agreement while keeping in place tariffs on $380 billion worth of Chinese imports. This is a big win for the U.S. negotiators as they are able to maintain some leverage in the form of tariffs. However, the ongoing tariffs will continue to plague the global economy and hinder the spending of corporations due to the ongoing uncertainties that the tariffs present. Despite the continued drag on the global economy, I still believe that the global economy will reach a bottom in 2020, and begin to stabilize, in part due to the easing tensions between China and the U.S. This stabilization will be a sigh of relief for large multinational companies.

Perspective From 6,237 Feet

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All Eyes On……..

Day Event/Earnings

Monday, January 20

Martin Luther King Jr. Day

Tuesday, January 21

None Scheduled

Netflix, Inc., United Airlines Holdings Inc., Haliburton Companies, Capital One Financial Corporation, Td Ameritrade Holding Company

Wednesday, January 22

U.S. Chicago Fed National index (December), Existing Home Sales (December)

Johnson & Johnson, Abbott Laboratories, Texas Instruments Incorporated, The Progressive Corporation

Thursday, January 23

U.S. Leading Economic Indicators (December)

Intel Corporation, Proctor & Gamble Company, American Airlines Group Inc., Comcast Corporation, Southwest Airlines Co., Kimberly-Clark Corporation, JetBlue Airways

Friday, January 24

U.S. Markit Manufacturing Flash PMI (January), Markit Services Flash PMI (January)

American Express Company

The fourth quarter earnings season picks up steam during the upcoming week. As I mentioned above, expectations remain muted for this cycle, however, there are some big names reporting during the upcoming week that should be closely watched. Below are some that I will be focusing on.

The upcoming economic data release is light due to the shortened trading week, however, the Markit flash PMIs will be widely watched.

About Ryan Nauman

As Market Strategist, Ryan Nauman’s primary focus is providing value added market and investment insight along with educating buy-side participants on investment analytics and portfolio management concepts.

Ryan provides analysis and research on market trends across asset classes, sectors, and regions to help empower better decisions for creating asset allocation strategies. His insight is disseminated through white papers, articles, training, and interviews with a target audience of financial advisors, portfolio managers, and investment analysts.

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