Weekly Economic Update

Economic Update 2-20-2018

  • In a busy week for economic releases, highlights included weakness in retail sales and some hints of increasing inflation as measured by import prices, PPI and CPI. On the positive side, manufacturing continues to look robust in several regional surveys and jobless claims remain very low.
  • Equity markets around the globe gained sharply on the week to rebound from their recent correction. Bonds fell back again as interest rates inched higher in reaction to higher inflation and expectations of stronger growth. Commodities regained some ground as well, led by higher crude oil prices and a weaker dollar.

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Weekly Economic Update

Economic Update 2-12-2018

  • Economic news for the week was light, relative to that of financial markets, but highlighted by gains in the ISM non-manufacturing survey and continued strong labor market data.
  • Continuing a trend begun the prior week, stock markets lost more ground, passing through the -10% correction threshold.  Bond markets were slightly negative as rates fluctuated before returning to their starting point.  Commodities lost ground led by declines in crude oil.

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Communicating the Recent Market Volatility with Clients

Listen to how Bud Kasper is communicating the recent spike in market volatility to his clients

Click here for playback

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LSA Tax Efficient Model Revisions

TAX EFFICIENT PORTFOLIO REVISIONS

 

As 2018 begins and volatility is starting to pick up LSA will be recommending changes to Private Client Tax Efficient portfolios this week to address three primary investment themes and to continue with our movement of reducing risk or correlations in the portfolios.  As market volatility is at historically low levels we believe that this will not be a continued trend moving forward especially around the Federal Reserve’s attempt to unwind QE.  The IPC will be recommending funds in the models with the attempt to reduce risk and to provide solid downside protection or improve diversification in the models targeting more attractive valuation opportunities.  Although the IPC continues to believe that a recession is not eminent in the next 6-12 months, we do believe that the probability of a recession in the next couple of years has increased greatly over the last eight months.  The February 2018 model changes are not targeting big shifts in asset class exposures as we believe the portfolios handled well in 2017 but we will continue to explore the use of alternatives to reduce correlations, emerging market equities to go after attractive valuations, and commodities as ways to combat inflation.

 

Please login to the LSA site to view all changes:

 

TRADE DATE IS SCHEDULED FOR February 7, 2018

 

Private Client Tax Efficient – (Inclusive of the NTF Models):

Posted February 1st:  Private Client Tax Efficient – targeted trade date – Wednesday, February 7th.

*As a reminder, the Revision Explanation Presentation is posted in the “Portfolio News,” section on the LSA Beta PC Tax Efficient home page.

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Special Market Commentary on Recent Volatility

No doubt some of you have been fielding client questions or considering ways to ‘remind’ clients about more normal market volatility that has resurfaced over the past week.

It’s likely that mainstream news will gravitate to headlines of ‘largest point drop in history’ in reference to the declines of Dow Jones Industrial Average reaching 1500 (which is true).  What isn’t discussed, however, is the far higher starting point of over 25,000, compared to the last notable low nearly a decade ago in March 2009 around the 6630 level.  As such, a thousand points today represents only a few percentage points after an extremely strong stretch of performance (and near-30% gains last year alone for the DJIA).  Insofar as the S&P 500 goes, 2017 did not feature a single negative month of performance and, including January, equity markets had gained in 22 of the last 23 months.

From a practical standpoint, we know such a winning streak is welcome when it occurs, and is easy to take for granted, but the fast trajectory is not sustainable indefinitely, nor are stretches of extremely low volatility.  A three-steps-ahead and one-step-back is generally healthier in keeping exuberance in check, although one might argue exuberance for the stock market has remained restrained, even with its success, as recent memories of the financial crisis are hard to erase and some level of skepticism persists.  Based on data over the last hundred years, pullbacks of -5% or so are to be expected about once per quarter, those of -10% about once a year, and the -15% variety have roughly occurred biannually.  We’re certainly on borrowed time for a moderate pullback, and have almost matched a record length of time without having one.

When momentum runs for an extended period, of course, the tipping point for a market correction and catalyst needed for generating one become far more sensitive.  What is the current catalyst de jour?  Interest rates.  Investors have to be careful in what they wish for.  Seeing signs of stronger economic and stock earnings growth, driven by better fundamental conditions, tax cuts, business activity and general speculative ‘animal spirits’, has been a key hope by many economists and strategists over the past several years.  The drawback, however, is that such strength can create the sometimes-tricky byproduct of higher inflation.  Any indications of inflation picking up (in terms of pace of wage gains, although overall inflation remains quite low) can cause bond market interest rates to pick up as well.  These higher rates could also be overdue, as the Fed has worked to normalize monetary policy by removing the artificial stimulus that characterized the past decade of extremely low rates.  On the flip side, there remains ample demand for U.S. bonds due to low interest rates in other developed countries and equity market shocks tend to push investors from stocks to bonds—lowering rates and closing the circuit somewhat.

All-in-all, there are not a lot of surprises here.  Market pullbacks based on fundamentals should be healthier and less damaging than those driven by a geopolitical shock, such as war or terrorist activity, or due to the more extreme case of heightened recession fears.  Last year represented an especially strong year for risk assets, where it was difficult to find data that wasn’t showing signs of improvement.  This is still the case; however, the better conditions get, the harder it is to improve further—this may be one of the key hurdles we face in 2018.

 

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Weekly Economic Update

Economic Update 2-05-2018

  • Economic news for the week was highlighted by the FOMC keeping interest rates unchanged in their first meeting of the year, Manufacturing surveys showed a bit of a drop while remaining high, housing data showed gains, and the employment situation report came in stronger than expected.
  • Global equity markets declined sharply on the week, led by weakness in the U.S. coupled with higher interest rates.  These same rates increases also punished bond markets, particularly on the long-term part of the yield curve.  Commodities also came in lower, due to a pareback in energy prices for the week.

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Fed Note

The first FOMC meeting of the year was uneventful, as expected, with no action on the interest rate policy front, with short-term rates kept to a targeted range of 1.25-1.50%.  There were no dissents.  As there was also no planned press conference, formal comments and a Q&A session from new Chair Powell will have to wait until March.

The official statement noted several items, including that the labor market has continued to strengthen, and economic activity has been rising at a solid rate.  This is in addition to improvements in employment, household and business spending.  However, inflation was noted as continuing to run at a sub-target pace, but some progress has been seen recently.  This fairly optimistic assessment was largely taken as a sign of another interest rate hike in March, which would be in keeping with their recent pace.

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Weekly Economic Update

Economic Update 1-30-2018

  • Economic data for the week was highlighted by a weaker-than-expected result for the prior quarter’s GDP and prior-month housing sales, but stronger showings in durable goods, jobless claims and the index of leading economic indicators.
  • Equity markets continued to grind higher in both the U.S. and abroad, with the latter helped by a sharp decline in the U.S. dollar, as the result of off-the-cuff comments from the administration.  Bonds were flattish with little changes in interest rates, while commodities gained ground.

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Weekly Economic Update

Economic Update 1-23-2018

  • Economic data for the week was mixed, with decent results reported in industrial production, while regional manufacturing results, housing starts and consumer sentiment came in weaker.  The Fed’s anecdotal Beige Book showed general strength across most segments of the U.S. economy.
  • Equity markets in the U.S. rallied for yet another week, with continued strong economic data, despite a more dramatic political backdrop.  Stronger global growth and a weaker dollar propelled foreign stocks to another week of leadership.  Bonds lost ground as interest rates rose for a variety of reasons, while commodities declined along with a pareback in crude oil prices.

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Weekly Economic Update

Economic Update 1-16-2018

  • Economic data for the week was led by growth in retail sales, tempered inflation results and mixed but continued strong labor market metrics.
  • Equity markets gained ground again, with U.S. markets leading the way upon strong sentiment.  Foreign markets also gained, with a help from a weaker dollar.  Domestic bonds generally lost ground with interest rates ticking higher.  Commodities gained across the board, but particularly due to higher crude and natural gas prices last week.

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Weekly Economic Update

Economic Update 1-08-2018

  • Economic data for the first week of the new year showed strength in manufacturing, a weaker result for services ISM, and a mixed result in employment, with strong jobless claims and ADP employment numbers, while the government employment report disappointed with challenging winter weather.
  • Equity markets started the year with significant gains globally, with optimism for the new year running high in both the U.S. and abroad.  Bonds faced a more challenging week, as interest rates increased along with these expectations.  Commodities rose to a more tempered degree, as crude oil again gained in price.

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Weekly Economic Update

Economic Update 1-02-2018

  • With an extremely light holiday calendar for economic data, highlights included stronger housing and regional purchasing data and weaker consumer confidence and jobless claims.
  • U.S. stock markets fell during the last week of the year, while international equities gained with the help of a weaker dollar.  Bonds fared well as interest rates declined for the week, and foreign bond markets also benefited from the dollar’s move.  Commodities across the board experienced a positive week.

U.S. stocks experienced a low-volatility last week of the year, resulting in a net decline in prices.  From a sector standpoint, utilities and industrials gained the most ground, while tech stocks pulled back by a percent, affected a bit by demand concerns for Apple’s new iPhone.

The dollar fell back by a percent, which acted as a strong tailwind for both developed and emerging market equities.  U.K. stocks were especially strong with positive online shopping results, while European and Japanese stocks actually lost ground for the week in local terms; however, the currency translation on the latter two regions turned the negative into a positive result for U.S. investors.  Emerging market outperformance was highlighted by gains in non-China Asian regions, such as Korea, Malaysia and Indonesia, although most nations benefitted from the weaker dollar to some degree and stronger commodity prices.  Chinese growth looks to be slowing again as we enter the new year, which always seems to result in a mixed bag for markets.  On one hand, as the global growth engine of recent years, a slowing economy equates to likely slower world GDP growth; at the same time, a more tempered pace of growth has spurred the government to work on reducing internal leverage and high debt levels, perhaps lowering the chances of a crisis. Continue reading

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