Weekly Market Overview | July 22, 2019

Peter A. Sorrentino, CFA

Macro shot of a graph showing Real GDP and Real EPS

Unlike the earlier first quarter reports, second quarter surprises have been a mixed bag with a slight bias to the bad side.



  • The Philadelphia Gold & Silver Index was the only significant U.S. index in positive territory last week, as the second quarter earnings reporting season got off to a tumultuous start. Most major U.S. stock indices fell roughly 1.4%.
  • The Communication Services sector fell the most last week, as Netflix lost 15% on a surprising decline in subscribers. Both Facebook and Disney slipped 3% in the sector as well, leaving the group down 2.52% on the week. Energy, which led the market advance just a week ago, fell 2.2% on a 7.6% decline in crude oil prices.
  • Basic Materials was the winning sector last week, up 1.06% on a 3.6% advance by Dow Chemical. The company received a favorable EPA ruling on one of its plastic feedstock chemicals.
  • Silver was the leading commodity last week with a gain of 6.5%, as investors sought to restore the traditional relative price ratio between gold and silver. Industrial metals were up – on average – 2%, while agricultural prices lost 4% due in large part to weakness in corn and wheat.

Unlike the earlier first quarter reports, second quarter surprises have been a mixed bag with a slight bias to the bad side. Recalling that the first two months of the quarter were pessimistic with reports of declining manufacturing, and housing activity was amplified by rising uncertainty regarding the sustainability of the economic expansion. Sentiment improved in early June, thanks to Federal Reserve Chairman Powell’s comment on monetary policy, but with the bulk of the quarter gone, it was too late to save the quarter. Fortunately, as soon as analysts reset their estimates following Q1’s upside surprise, they quietly set about lowering estimates.

U.S. Equity Themes
The impact of Netflix subscriber loss on not only the share price, but on the Communication Services sector as a whole, points out vividly the risk inherent in a narrow market leadership. Complacency tends to lead to excess, and market corrections, like recessions, are how these are remediated.

Credit Markets enjoyed another week of solid investor demands that pushed rates down across the term structure. There were two disconcerting new stories last week, both emanating from the leveraged loan market. One defaulted credit did enough damage to warrant the closure of a Chicago-based leveraged loan fund manager; you can see the price change in Exhibit 1 below.

This once small corner of corporate finance has grown exponentially over the last ten years to join the ranks of other high-yield credit instruments in size and scope. As investors discovered with subprime mortgages, the statement value means nothing if there are no buyers on the other side. With yields having been depressed for so long, investors have ventured into untested markets where the assumption of a consistent and orderly market could place them in peril. We have been strenuously encouraging customers to shed these lower-quality assets.

 

Price Plunge

Clover Term Loan Dives to Distressed Levels

Exhibit 1 (Source: Bloomberg)

For a PDF version of this publication, click here: 07.22.2019_WeeklyMarketOverview.



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July 22, 2019
Peter A. Sorrentino, CFA, Senior Vice President and Chief Investment Officer of Comerica Asset Management Group

Peter A. Sorrentino, CFA

Senior Vice President and Chief Investment Officer, Comerica Asset Management Group

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