Weekly Economic Update

Economic Update 8-19-2019

  • Economic data for the week included positive reports in retail sales, several regional manufacturing surveys, and a combination of several labor statistics. On the disappointing side were industrial production, housing starts, and jobless claims, which ticked up on the week.
  • Global equity markets in both the U.S. and overseas endured a volatile week, with several high percentage days in both directions, but ending only about a percent lower on net. Bonds fared more positively on the investment-grade side, due to lower interest rates and flows away from risk. Commodities were mixed to lower, mostly due to lower grain prices.

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Weekly Economic Update

Economic Update 8-12-2019

  • Economic news for the week included weaker but still-positive numbers from the ISM non-manufacturing index, tempered producer prices, and a strong jobless claims report.
  • U.S. equity markets declined around the world, with trade tensions again escalating early in the week, before subsiding somewhat. Bonds fared well in the aftermath of poor risk asset performance, as interest rates declined across the yield curve. Commodities were mixed, as price declines in energy offset gains in precious metals.

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Weekly Economic Update

Economic Update 8-05-2019

  • Last week saw the Federal Reserve reduce interest rates, largely as expected, although the official statement language was mixed. Positively, consumer confidence rose last week, as did personal income and housing, while manufacturing results showed some weakness. The employment situation report for July came in largely as expected, showing decent growth, although the pace of improvement has slowed.
  • Equity markets in the U.S. and abroad declined several percent during the week, due to announcements of new tariffs on China and Fed policy language being less accommodative than expected. Conversely, bonds fared very well as interest rates across the yield curve declined sharply. Commodities also declined on net, with energy and industrial metals falling in price.

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Fed Update

Fed Note:

The July FOMC meeting resulted in a 0.25% reduction in the federal funds rate, to a new range of 2.00-2.25%. The policy vote was far from unanimous, with eight members supporting the change, and the Fed presidents from Kansas City and Boston each dissenting. This reflects the varied commentary from members in recent weeks as to the necessity of the cut. This was the first rate cut since December 2008, when circumstances were obviously far different from those seen today.

The formal statement reflected the Fed’s newly-adopted dovish stance, notably the persistently muted inflation and ‘implications of global developments.’ The Fed also announced that it would end its balance sheet drawdown in August—two months before they’d planned. Other language was little changed from June, with economic activity noted as ‘moderate,’ and labor market as ‘strong,’ but inflation remaining low, and business fixed investment still ‘soft.’

This was a move largely expected by financial markets, although the magnitude of the move remained in doubt until recently, when fed funds futures odds pegged the smaller change at 80%. Current futures probabilities put the best odds at two additional cuts by December. Despite the change in tone this year, manifesting in today’s change, the primary Fed mandates remain somewhat conflicted:

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Weekly Economic Update

Economic Update 7-29-2019

  • In a slower week for economic data, gross domestic product for the second quarter, durable goods orders, and jobless claims each came in better than expected. Several housing statistics continued to point to mixed conditions.
  • U.S. equity markets fared well with positive returns, outperforming foreign stocks, which were held back by a stronger dollar. Bonds were generally flat on the week, with credit outperforming governments, and foreign markets mixed. Commodities lost ground broadly, due to the dollar effect, although energy was the sole exception as crude oil prices ticked modestly higher.

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Weekly Economic Update

Economic Update 7-22-2019

  • Economic data for the week included positive surprises in retail sales as well as several regional manufacturing surveys, mixed results in industrial production and housing, while the index of leading economic indicators pointed to weakening conditions.
  • U.S. equity markets declined as earnings season kicked off for the most recent quarter.  Foreign stocks fared slightly better, despite a stronger dollar.  Bonds gained as investors moved away from risk during the week, and the Fed continued to hint at lower interest rates.  Commodities declined as prices for crude oil and natural gas declined sharply.

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Weekly Economic Update

Economic Update 7-15-2019

  • Economic news for the week included a slightly stronger-than-expected consumer price inflation reading, mixed jobless claims, and slightly weaker government job openings. The minutes from the June FOMC meeting noted some economic concerns and raised expectations for possible interest rate cuts sooner than later.
  • U.S. equity markets fared well in the U.S., led by a variety of sectors, outperforming foreign stocks, which largely ended in the negative for the week. Bonds lost ground globally as interest rates ticked higher. Commodities gained in almost all segments, led by energy due to oil prices rising back above $60.

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Weekly Economic Update

Economic Update 7-08-2019

 

  • Economic data for the week was led by declines in both ISM manufacturing and non-manufacturing indexes, as well as weaker data in construction and factory orders. However, the employment situation report came in far stronger than expected, and jobless claims remain at low levels.
  • US equity markets fared well last week, with improved sentiment over trade; foreign equities were also positive, but gains were pared by a strong dollar. Bonds were mixed, with credit outperforming governments as interest rates ticked slightly higher. Commodities were also flattish, with little change in the price of crude oil last week.

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Weekly Economic Update

Economic Update 7-01-2019

Economic data for the week included a little-changed GDP report for Q1, mixed housing results and consumer confidence readings, yet a weaker durable goods report.

U.S. equity markets generally lost ground last week, while foreign equities earned small positive returns. Bonds were generally positive as rates continued to tick downward in keeping with dovish central bank language. Commodities were mixed, with crude oil gaining an additional few percent on the week, offsetting lower prices in agriculture.

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Weekly Economic Update

Economic Update 6-24-2019

  • Economic data for the week included no action by the FOMC, although the communication was far more dovish. Other news included a sharp decline in several key regional manufacturing indexes, a flattish index of leading economic indicators, mixed to lower housing market metrics, while jobless claims improved again to low levels.
  • U.S. and foreign equity markets both experienced strong gains for the week, led by optimism for trade resolution and dovish central bank language about interest rates. Bonds fared well also, due to the recent ongoing drop in interest rates across the developed world, led by comments from the Fed and ECB. Commodities gained ground due to higher oil prices following rising tensions in the Middle East.

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LSA Revisions – June 2019

LSA Revisions – June 2019

LSA will be making revisions to the following model portfolios, (Private Client Tax Efficient, ETF, and ETF Tactical). All the other mutual fund models will be targeting a rebalance at this time.

LSA will be making revisions to the following portfolios:

Posted Wednesday, June 19th: Private Client Tax Efficient, ETF, and ETF Tactical – Targeted Trade Date – Wednesday, June 26th.

*The Mutual Fund and ETF revisions will impact the NTF models as well.

*As a reminder, the Revision Explanation Presentation/Video will be posted in the “News & Announcements,” section on the LSA Beta home page and will be posted at the end of the business day June 20th.

Investment Rationale:

As volatility picks up, LSA will be recommending changes to the PC Tax Efficient, ETF and ETF tactical portfolios over the next week to address a couple of  investment themes and to continue with our movement of reducing risk or correlations in the portfolios.  As market volatility picked up in the fourth quarter of 2018, we believe this will be a continued trend moving forward especially around the Federal Reserve’s attempt to balance the process of unwinding QE, and the conundrum of where to go with rates, the fears of a trade war, strong dollar, and a gridlocked congress.  The IPC will be recommending funds in the models with the attempt to reduce risk and to provide solid downside protection or to improve diversification in the models targeting more attractive valuation opportunities.  The market rebound in the first half of 2019 has generated an opportunity to rebalance most of the LSA mutual fund models but the IPC wanted to focus in on the PC Tax Efficient and ETF models that did not make the November 2018 changes due to capital gain issues.  The IPC continues to believe that the probability of a recession in the next couple of years has increased greatly over the last few quarters.  The June 2019 model changes are not targeting big shifts in asset class exposures, as we believe the portfolios handled well in recent volatility, but we will continue to explore additional ways of addressing risks to the portfolios.

There will be a focus on two general themes with this round of revisions:

  1. With the mutual fund and ETF models, the IPC is focusing our efforts to clear out some underperforming fund positions. Over a short period of time we have had a couple of managers underperform their appropriate benchmark.  We addressed some of these underperformers in the MF/ETF models in November 2018 and want to continue this effort for the PC Tax Efficient and ETF models in June of 2019.  The LSA IPC would like to take this round of revisions to introduce replacements to these positions.
  2. The IPC is addressing some duration concerns with our fixed income allocations. This is predominately in the ETF models where we have directed the models to be well diversified for a normalizing (rising interest rate) environment.  This has served the fixed income sleeve well for the last several years.  That said there has been a significant change in direction from the Federal Reserve in 2019.  Powell and company have moved from hawkish in 2018 rising rates to dovish in 2019 using language that suggest no rate hikes for the year and a market that is starting to price in the probability in rate cuts.  This has given the advantage to duration in the bond markets where we have been light in the PC Tax Efficient and ETF models.  Some of the recent changes are to focus on bringing a little duration back to the ETF models to help participate in the event that the Fed remains in a stale mate favoring duration more in the coming months and quarters.

 

LSA continues to follow our high level thesis in which we believe that in late 2018 the US economy began to realize a couple of difficult headwinds that has increased the probability of a recession in the coming years.  We experienced firsthand some of these headwinds in the fourth quarter of 2018.   These headwinds are not limited to, but include, the idea that the Fed rate hikes that started in December of 2015 will be thirty plus months in play and getting long in a typical normalization cycle.  We are also dealing with uneasy trade policy discussions with China, a softening in corporate earnings and a deficit that is rapidly growing.  The markets will also be facing the unwinding of bonds purchased by the Fed in the numerous QE programs.  Although our current recession indicators are not sounding the alarms just yet we do have three of our seven indicators starting to raise flags.  The LSA IPC will be looking to slowly reduce risk from the portfolios over the course of the next year and believe that more strategic shifts will happen early fourth quarter.  We believe such model changes could be particularly helpful during conditions of weakness for equities and/or other equity-correlated risk assets.

 

 

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Fed Note

Fed Note:

Following their June meeting, the Federal Open Market Committee (FOMC) made no change to the 2.25-2.50% range for the fed funds rate. However, member appeared split on the outlook, with one member voting for a cut today, while others expect cuts towards the end of the year. This does seem to raise the probability significantly for a cut in July or September.

The formal statement reflected a change in economic growth from ‘solid’ to ‘moderate,’ and although household spending has picked up, business capex spending has remained soft. The inflation picture was acknowledged as weakening, while long-term expectations remained unchanged. As expected, the term ‘patient’ was removed, with concerned noted about a variety of ‘uncertainties.’

This was largely as expected, although in recent weeks, futures markets had begun to price in a 20-25% chance of a quarter-point cut at this meeting. The odds for a rate cut down the road, though, have risen sharply, with December futures implying probabilities for 2-3 cuts by year-end, and more in 2020. This seems a bit extreme on the surface, but markets do tend to overshoot, with the fed funds assumption markets being no exception.

The narrative, at least from the market’s perspective, has certainly changed, with the possibility of easier monetary policy rising in light of a possible longer trade negotiation with China and the ramifications of imposed tariffs in the meantime resulting in global slowdown risks. However, in recent speeches, the Fed hasn’t alluded to cutting rates specifically—merely that they would do as they always do and ‘act as appropriate’ to stabilize the economy. This is particularly tricky now, though, with economic conditions continuing to show modest expansion for the most part, but with greater uncertainty on the margin, so the Fed has been put into a bit of a corner. Historically, merely seeing potential for slowing hasn’t been a clear path to rate cuts without concrete reports of deteriorating data. This is in contrast to hopes by some for ‘insurance’ cuts, which would presumably be made as a hedge against bad outcomes that may or may not unfold—a strategy that the Fed hasn’t generally used. The President’s continued calls for lower interest rates to sustain the economic expansion have also represented a political (and an integrity) burden on an otherwise independent entity.

The current conditions of the Fed’s primary mandates reflect a similar conflicted message:

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