Weekly Economic Update

Economic Update 2-18-2020

 

  • Economic data for the week included improvements in retail sales, jobless claims, and consumer sentiment; industrial production declined for the month, led by some idiosyncratic factors. Consumer and import price inflation remained tempered, in line with recent trends.
  • U.S. equity markets gained on the week as progress in containment of the coronavirus appeared to raise hopes for mitigating economic damage from the contagion. Foreign stocks gained slightly in local terms, but were held back by a stronger dollar. Bonds were little changed, with credit outperforming governments. Commodities gained, especially in energy and industrial metals, which are most sensitive to economic activity.

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Weekly Economic Update

Economic Update 2-10-2020

  • Economic data for the week featured an unexpected rebound in manufacturing sentiment, continued strength in non-manufacturing/services sentiment, as well as an upside surprise for the employment situation report for January.
  • Global equity markets recovered last week, with progress noted on virus containment as well as financial stimulus from the Chinese government. Bonds lost ground as investors moved back into risk assets, pushing interest rates higher. Commodities were mixed, with crude oil prices seeing continued pressure from demand concerns and high inventories.

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Weekly Economic Update

Economic Update 2-04-2020

  • Economic news for the week included the Federal Reserve taking no action on interest rates, and GDP gaining nominally for the last quarter of 2019. Durable goods came in better than expected, tempered results were seen in housing and consumer confidence, while manufacturing weakened in the well-watched Chicago PMI survey.
  • Equities around the world lost ground during the week as uncertainties surrounding the new coronavirus put a damper on early-year positive sentiment. In keeping, high-quality bonds gained due to the reversal of flows. Commodities also suffered due to the unknown, but assumed negative economic growth impact.

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FED NOTE

Fed Note:

The FOMC completed their January meeting, with no stated changes in monetary policy, and no dissents. The target fed funds rate remains at 1.50-1.75%.

The formal statement was little changed, noting low inflation and economic growth expanding at a ‘moderate’ pace, although household spending was downgraded from ‘strong’ to ‘moderate’ as well, in the only notable difference from December. While insignificant to monetary policy overall, the Fed did raise a unique rate it pays to banks for excess reserves kept at the Fed from 1.55% to 1.60%—more toward the ‘mid-range’ of the fed funds target. This relates to an ongoing desire to balance incentives for borrowing and lending in the short-term ‘repo’ markets, which has proven a little tricky in recent months.

As for the Fed’s key decision items, little has changed from the prior meeting. This is in line with the lack of policy adjustment today or even hints of future action. Continue reading

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Weekly Economic Update

Economic Update 1-27-2020

  • In a lighter week for economic numbers, home prices and sales both increased, while the index of leading economic indicators showed a decline to end the year.
  • Global equity markets all fell due to global concerns over the new outbreak of the coronavirus in China. Bonds, in typical fashion, fared well with interest rates ticking down across the treasury yield curve. Commodities also suffered along with fears of a global growth impact from the virus—especially affecting already-battered energy prices.

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Weekly Economic Update

Economic Update 1-21-2020

  • Economic news for the week included better results from several regional manufacturing indexes as well as stronger housing starts. On par with forecasts were tempered producer and consumer inflation readings, as were retail sales, while industrial production came in on the weaker side.
  • U.S. and foreign equity markets gained, with U.S.-China trade progress and the improved economic data. Bonds were little changed, although foreign debt was affected by a rise in the dollar. Commodities declined due to currency effects and lower energy prices.

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Weekly Economic Update

Economic Update 1-13-2020

 

  • Economic data for the week included a stronger than expected ISM non-manufacturing/services survey. While the December employment data came a bit below expectations, it still showed decent growth.
  • U.S. equity markets fared positively, as geopolitical strains with Iran tempered, outperforming foreign developed market stocks, but underperformed emerging markets. Bond markets were little changed on net. Commodities lost ground as crude oil prices plummeted with Middle East U.S.-Iran de-escalation and high global supplies.

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Weekly Economic Update

Economic Update 1-6-2020

  • Economic data for the turn of the New Year included mixed results in manufacturing, yet stronger construction and housing data, as well as continued strength in labor featured by low jobless claims.
  • U.S. and foreign equity markets ended the week flat to downward, on the heels of geopolitical turmoil in the Middle East by the end of the week. Bonds fared well, as interest rates declined along with investors seeking safety in such an environment. Commodities ticked higher along with higher crude oil prices.

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Weekly Economic Update

Economic Update 12-30-2019

  • On a shortened holiday week, economic data was limited to weaker-than expected durable goods orders, mixed new home sales results and lower jobless claims.
  • Global equity markets gained, with continued seasonal optimism, led by the risk-oriented segments, including consumer and emerging markets. Bonds rose slightly due to lower interest rates. Commodities rose in most all segments with help from a weaker dollar.

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Weekly Economic Update

Economic Update 12-23-2019

  • In a heavier week for economic releases, housing data came mixed but on a stronger trend as of late, industrial production increased more than expected, while manufacturing was mixed, as was labor data.
  • U.S. equity markets gained along with stronger geopolitical optimism, as did emerging markets, both of which outperformed foreign developed markets. Bonds lost ground on the heels of this better sentiment and accompanying higher interest rates. Commodities generally gained ground as well, led by energy and metals.

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December 2019 Model Updates

December 2019 Model Updates:

LSA will be completing our revisions to model portfolios that were not addressed in November.  This includes the ETF, SRI, and VA models that were postponed in November due to further review that was needed before release.  The full revision release schedule can be found below.

LSA will be making revisions to the following portfolios:

Posted Wednesday, December 11th: ETF, ETF Tactical, Transamerica, and SBL Advisor Design – targeted trade date – Wednesday, December 18th.

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

*LSA will be consolidating all NTF ETF models over the next six months now that the custodial platforms are offering commission free ETFs for all ETFs.

*LSA will not be making changes to the PC Tax Efficient or PC Income models until first quarter of 2020

*As a reminder, the Revision Explanation Presentation/Video is posted in the “Portfolio News,” section on each of the platform home pages and will be posted at the end of the business day on the targeted posted date.

Investment Rationale:

As communicated in our latest portfolio update presentation, the LSA Investment Policy Committee continues to believe that the probability of recession will continue to grow over the next 12 – 18 months.  With this as a high level thesis, the upcoming changes to models have been focused around two themes.  First, reducing risk…..this is the concept of taking down risk on the fringes of models to get a little more conservative, but not to restrict up-capture participation.  We believe that this reduction of risk will allow the models to continue to benefit from a “cautiously optimistic” stance on the markets.  Our intent is to start addressing market concerns with a focus on becoming more defensive.  The committee has also outlined a “part two” revision that is being defined as “hedging risk.”  This hedging risk movement is not expected to be implemented until 2020 and will be data dependent upon further deterioration of our recession indicators as outlined in our portfolio update presentation.  The hedging risk movement, down the road, has a more distinct focus on reducing correlations to the portfolios with the use of low or negative correlated investments to target alpha opportunities in a more prolonged correction, or recession.  Both phases of upcoming changes are addressing the simple stance on current market conditions that the IPC believes that there are greater downside risks at this point in the cycle, versus upside opportunity.  If you have not had a chance to review the monthly portfolio update video please do for greater details around potential headwinds that LSA is concerned with at this time.   (see website for replay)  The LSA IPC is identifying this round of revisions to focus on reducing some risk to the models in order to help address these growing concerns of potential recession as the current market cycle starts to wind down.  Although the committee continues to be cautiously optimistic over the next six to eight months, the focus of changes in this first round of revisions is to start the movement of getting more protection in the models.  The high level concepts that will be addressed can be found below.

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

  1. The LSA IPC will be reviewing every model, position by position, to make sure that we are achieving the spread profile that we target with each of the mutual fund, ETF, and subaccounts in the various models. What the committee is looking for is a manager’s ability to generate a positive spread between average up-captures and down-captures with an emphasis on down-captures.  This spread relationship is where we continue to believe real wealth accumulation comes from over time. During periods of market volatility, this spread can potentially help create a favorable return profile when markets begin to struggle. This review continues to support the LSA search process, but the IPC will focus on better down-capture characteristics at this time, to emphasize our focus on risk reduction.
  2. The IPC will be increasing some defensive posturing within the models. This translates to an average of about a 5% increase to fixed income.  This will begin to exercise the more conservative sides of the bands from a model perspective.  The increase in fixed income is focusing on higher quality asset classes as the committee continues to take down credit exposures to the models.  This movement includes the reduction, or removal, of bank loans in a number of the models and increasing more of our core bond position.  Please note that a more core bond position will increase our duration exposure. In doing so, this could create a greater correlation to the 10-year treasury.  That said, this increase in duration, could potentially provide a better risk-off buffer with our overall fixed income exposures.  As volatility concerns continue to grow, credit exposures become more correlated to the equity markets, and eliminate some of the risk posturing we often lean on out of our fixed income sleeve.
  3. The LSA IPC will also be looking to reduce some equity exposures to the models. This reduction will predominately be focused on international equities that have continued to struggle.  In addition, when appropriate, we will also reduce some domestic equity exposures where the committee identifies overextension in the models.  LSA continues to believe that valuations remain attractive with international equities but the developed world continues to struggle with little improvement of economic data.  On the domestic equity side we continue to stay focused on overweighting large cap versus small cap and maintain a neutral stance on value versus growth.

To recap….LSA continues to follow our high level thesis in which we believe that the US economy will be faced with a couple of difficult headwinds that have increased the probability of a recession taking place in the next 12-18 months. We experienced firsthand some of these headwinds in the fourth quarter of 2018.   These headwinds include, but are not limited to, concerns with an inverted yield curve, uneasy trade policy discussions with China, a softening in corporate earnings and a deficit that is rapidly growing.   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 with this round of model updates.  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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Weekly Economic Update

Economic Update 12-16-2019

  • Economic news for the week included the Federal Reserve keeping interest rates unchanged following their monetary policy meeting, as expected. Consumer inflation came in slightly higher than forecasts, while producer prices disappointed, and retail sales were positive but below expectations.
  • U.S. and foreign equity markets both gained ground with an announced preliminary U.S.-China trade deal, which boosted sentiment. Bonds were mixed to slightly higher, as interest rate policy remained consistent. Commodities gained across a variety of sub-sectors, including crude oil, due to planned OPEC production cuts.

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