Economic Update 11-02-2015

• Economic data for the week was again mixed, with advance GDP for the third quarter coming in at a tempered level, but not too far off of expectations, while housing numbers and consumer sentiment surveys disappointed.  However, the Chicago PMI manufacturing report moved back up into positive territory.
• Equity markets gained a bit on the week in the U.S., but struggled abroad—especially in emerging markets.  Bonds also lost ground domestically upon higher interest rates.  Commodities were flat overall, but energy bounced back to gain a few percent on the week.

U.S. stocks rose on the week slightly with another mixed result on the economic front and equally mixed earnings numbers.  For Q3 as a whole, year-over-year earnings are looking to experience their worst decline since 2009—however, removing the energy patch from the equation, the results look quite a bit better, and solidly positive.  From a sector standpoint on the week, healthcare and consumer cyclical stocks led the way, gaining several percent on the week, while more defensive staples and utilities lost ground.

The U.S. government agreed on a debt ceiling deal, that would extend the deadline predicted to be hit in early November to out to March 2017.  No other legislation was piggybacked on the bill, which may be a good thing by turning this situation back into a ‘given’ instead of being held hostage by policy bickering—uncertainty from that was what caused so much market turmoil a few years ago, so perhaps some lessons have been learned.  More than one economist has lamented the periodic turmoil each time this issue surfaces, with hopes for a longer-term fix for this process not looking likely anytime soon.

Overseas, stocks came in weaker generally, with Japan as one of the few major markets ending up in the positive, as the JCB voted overwhelmingly to keep the current stimulus plan in place and noted, similar to ECB President Draghi a few years ago, there are essentially ‘no limits’ on policy options for ongoing stimulus.  Emerging markets were hit again, largely in the commodity exporter complex in Indonesia, Russia, and Brazil, among others (returns for the month of October, however, were quite good for this group).

U.S. bonds in the U.S. struggled, as hawkish FOMC language and lack of a real negative pushed rates higher (the path of least resistance at this point).  High yield and other credit fared relative well during the week, while longer governments with little coupon cushion experienced the worst declines.  Foreign bonds fared relatively well in developed markets (mostly Europe, but also Japan) as hopes for additional stimulus this year dampened interest rates, while emerging markets were mixed (some winners and some losers, based on oil dependency).

Real estate in the U.S. generally lost ground in line with higher interest rates, although the more cyclical lodging/resort sector recovered sharply, as did non-U.S. developed market REITs in Europe and Japan—again, with sentiment driven by hopes for additional economic/monetary stimulus that can be expected to help prospects for tenant demand growth critical to real estate pricing.

Commodities were largely flat on average, with indexes again driven by the amount of energy exposure.  Crude oil prices took a tumble early in the week before recovering by +5% to near $46.50 by Friday.  It’s now affecting the big players, as Chevron announced a cut of almost 10% of its workforce as a result of the new oil price reality.  The worst case fears have trailed off a bit, though, as the last several months have seen prices stick to a general trading range of a few dollars in either direction of $45 over the last several months as demand and supply news has tended to offset from week to week.  Last week, metals were generally weaker across the board, while agricultural prices were several percent higher thanks to the ‘softs’ group (specifically, cocoa, coffee and sugar), due to some crop harvest uncertainty abroad.

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.                                                                               

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.