Weekly Economic Update

Economic Update 1-14-2019

  • Economic data for the week was lighter than usual, due to the Federal government shutdown, but was highlighted by a tempered but still-strong ISM services report, pullback in consumer inflation, decent labor data and release of the minutes from the last Fed meeting.
  • Global equity markets recovered by several percent, in a continued effort to shake off the bear market of last quarter.  Bonds were mixed, with interest rates inching higher.  Commodities gained ground, again led by a recovery in crude oil pricing.

 

U.S. stocks continued their recovery last week, up several percent on hopes (again) that the U.S.-China trade dispute would be resolved through ongoing talks.  It appears progress has been made in the areas of U.S. farm exports and better access to Chinese markets, while the key issue of Chinese technology pilfering remains unresolved.  There also appears to be some recognition of value in equity markets, with P/E’s falling below long-term averages, after spending parts of the last year or two looking a bit ‘tired’, which is a euphemism for mildly expensive, even if not quite bubble-like.  The now record-long government shutdown has not resulted in a major deterioration in market sentiment, although Fed chair Powell also acknowledged that a long-lasting episode could ultimately end up negatively influencing economic growth.

From a sector perspective, cyclicals outperformed, with industrials, consumer discretionary and technology leading, while defensive staples and utilities ended with minimal gains.

Foreign stocks rose along with U.S. equities, albeit to a lesser degree, with continued hope for U.S.-China trade resolution.  This correlation with domestic stocks has been the tendency over the past several months, which has outweighed fundamental concerns over weakness in economic growth shown by slower industrial production numbers in Germany and France, in particular, and mixed results in Japan, which is hoping to generate some inflation to show that growth could be eventually improving.  Overall, growth levels remain challenged in the foreign developed world, which has explained the weak results of regional stock markets.  Emerging markets outperformed developed, with hope for trade resolution, which boosted China and Pacific region equities, in addition to stronger commodity results as of late, which has boosted prospects for materials exporters.

U.S. bonds were mixed in the week, with government indexes down as interest rates ticked back higher slightly, but credit outperformed with spreads contracting.  Accordingly, high yield bonds experienced strongly positive results, followed by floating rate bank loans.  Each of the latter two asset classes suffered during the fourth quarter as investor flows away from risk highlighted their somewhat higher equity correlations compared to other segments of fixed income.  Foreign bonds gained slightly, with help from a weaker dollar.

U.S. treasury debt has long been thought of as the global ‘risk-free’ asset, where default is assumed to be unthinkable, and, therefore, is often the recipient of inflows when conditions turn sour in other asset classes.  However, there are times when ‘risk-free’ isn’t a failsafe, either.  As if the lesson wasn’t learned several years ago, the ongoing federal government shutdown has again caused bond rating agencies to discuss and/or even consider a de-rating for U.S. government debt.  Even while Standard & Poor’s downgraded treasury debt a partial notch to AA+ during that 2011 summer debt ceiling debacle, Moody’s and Fitch held firm at AAA (albeit with their respective outlooks downgraded less severely to ‘negative’).  However, Fitch has been providing warnings that stunts such as the government shutdown could again threaten that coveted AAA status, stating that such uncertainty was not consistent with behavior of nations deserving a top rating.

Real estate experienced very strong gains for the week, surpassing broader equity markets, with the exception of small cap.  Cyclically-sensitive lodging and resorts outperformed, although all segments were sharply positive.

Commodities gained several percent, again driven by the volatile movements of crude oil, but also a weaker dollar and an increase in natural gas prices.  Crude oil continued its roller-coaster ride, regaining ground to end the week 8% higher, at just under $52/barrel.  While OPEC has reiterated its desire to raise prices to more budget-friendly levels in Middle Eastern and Eastern European producing nations, much of the recent volatility has been coupled with equity market gyrations and concerns over global growth—although demand is far more predictable than short-term supply.  While forecasts are often not helpful in the commodity space, with no ‘fair value’ metrics based on actual cash flows, estimates for crude in the coming year appear to be in the mid- to higher-50s at this point.

 

Period ending 1/11/2019 1 Week (%) YTD (%)
DJIA 2.42 2.93
S&P 500 2.58 3.63
Russell 2000 4.84 7.36
MSCI-EAFE 2.89 3.90
MSCI-EM 3.75 3.67
BBgBarc U.S. Aggregate -0.04 0.18

 

U.S. Treasury Yields 3 Mo. 2 Yr. 5 Yr. 10 Yr. 30 Yr.
12/31/2018 2.45 2.48 2.51 2.69 3.02
1/4/2019 2.42 2.50 2.49 2.67 2.98
1/11/2019 2.43 2.55 2.52 2.71 3.04

 

 

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. 

 

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Weekly Economic Update

Economic Update 1-07-2019

  • Economic data was sparse in the first week of the new year, with ISM manufacturing data disappointing, but employment numbers came in much stronger than expected.
  • U.S. equity markets recovered during the week, largely due to Friday’s job news and optimistically-received Fed remarks; international stocks were not far behind, with more tempered gains.  Bonds also gained a bit of ground along with lower interest rates.  Commodities earned positive returns, due to a recovery in crude oil prices.

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Weekly Economic Update

Economic Update 12-31-2018

  • In a week shortened by the Holidays and a government shutdown, affecting the release of certain economic data, consumer confidence declined sharply, housing data was mixed, while jobless claims remained strong.
  • Global equity markets ended the week with gains, despite continued mixed sentiment and unseasonal volatility.  Bonds fared decently with lower rates in the U.S., and foreign debt being helped by a weaker dollar.  Commodities lost a bit of ground, with continued decreasing prices for crude oil.

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Weekly Economic Update

Economic Update 12-24-2018

  • In a busy week for economic data to nearly wrap up 2018, the Federal Reserve raised interest rates by another quarter-percent.  In other economic data, sentiment, leading economic indicators and jobless claims remained strong; durable goods orders and several manufacturing surveys, were positive but lackluster; and housing data was mixed.
  • U.S. equity markets suffered mightily again last week, with a variety of concerns weighing on investors’ minds.  Foreign stocks lost ground as well, although emerging markets held up better than developed markets.  Government bonds fared decently due to the movement away from risk and lower long-term yields.  Commodities struggled due to a double-digit decline in the price for crude oil.

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Fed Update

Fed Note:

The Federal Reserve Open Market Committee raised the fed funds target rate by 0.25% to a new level of 2.25-2.50%.  This was widely anticipated, with a high futures market probability of this outcome beforehand.  There were no committee dissents.

The formal statement was little altered from November, noting that economic activity remains strong, unemployment remained low, household spending has continued to grow, business fixed income has moderated, and inflation remains near the policy target.  However, there was a tempering of language in terms of further rate hikes (including insertion of the word ‘some’) as well as a comment that the Fed ‘will continue to monitor global economic and financial developments’ for assessment in future policy actions.  Overall, the updated economic output pointed to a base case of about two interest rate increases next year.

The issue as of late has been a pause in economic acceleration, with building fears that the peak in economic activity has been reached, and an eventual slowdown and recession being the next stop.  However, it is possible this assumption may still prove premature.  In keeping with changing data, what was once thought of as a done deal—a continuation of this same pace of rate hikes into 2019—is now looking far less certain.  Initial estimates by a variety of economists of 2-4 hikes next year have fallen back to 1-2, in keeping with the Fed’s assumptions, with the caveat of policy activity remaining even more ‘data dependent’ than usual.  Chair Jerome Powell’s comments during the last several weeks have confused markets a bit—with initial comments alluding to the current fed funds rate being ‘far below’ the ideal level, while more recent discussion pointed to the current rate being ‘just below’ ideal.  Probabilities for future hikes are certainly dependent on this changing sentiment and communication posturing to a certain degree.

On the dashboard:

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Weekly Economic Update

Economic Update 12-17-2018

  • Economic data for the week came in mixed to decent, with retail sales a bit stronger than expected, continued strength in job openings and jobless claims, as well as tempered producer and consumer inflation results.
  • U.S. equity markets declined over fears of possible slowing growth, as did foreign stocks, with small gains turned to losses after being adjusted for a stronger dollar.  Bonds were mixed, with impacts dependent on duration, credit quality and currency last week.  Commodities lost ground due to the stronger dollar and continued falling energy prices.

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Weekly Economic Update

Economic Update 12-10-2018

  • Economic data for the week was highlighted by stronger results for ISM reports in manufacturing and services, while factory orders and employment numbers for November came in showing slower growth than expected.
  • Global equity markets slumped, with foreign faring a bit better than U.S. with help from a weaker dollar.  Government bonds performed well, being the recipient of investor flows.  Commodities rebounded as well, as crude oil prices rebounded higher.

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Weekly Economic Update

Economic Update 12-03-2018

  • Economic data for the week included an updated release of prior-quarter GDP that was unchanged, stronger housing prices but weaker housing sales metrics, slightly weaker consumer confidence and an increase in jobless claims.
  • U.S. equity markets rebounded sharply with decent economic numbers and less aggressive language toward interest rate tightening from the Federal Reserve.  Foreign stocks followed suit, with emerging markets outpacing developed.  Bonds gained ground as interest rates declined, in both U.S. and foreign markets.  Commodities were mixed, while crude oil prices rebounded slightly.

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Weekly Economic Update

Economic Update 11-26-2018

  • On a holiday-shortened week, economic data consisted of growth, albeit at a tempered pace, of the Leading Economic Indicators, mixed housing data and jobless claims, as well as weaker durable goods orders and consumer sentiment.
  • Global equity markets declined for another week, as all regions fell back in unison.  Bonds were mixed as U.S. high quality bonds were little changed, but foreign bonds were negatively impacted by a stronger dollar.  Commodities were again punished by another large decline in the price of crude oil.

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LSA Revision Reminder

LSA Revisions – November 2018

LSA will begin making revisions to the following model portfolios over the next few days, (Private Client, PC Traditional, PC Blended, ETF, and SRI. Please note the date that the revisions will be posted to the website. These posts will be made at the end of each business day.

LSA will be making revisions to the following portfolios:

*** Posted, November 14th: SRI, Private Client Blended – TRADE DATE – Monday November 19th.

*** Posted, November 15th: Private Client, Private Client Traditional, ETF – targeted trade date – Tuesday, November 20th.

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

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

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Weekly Economic Update

Economic Update 11-19-2018

  • Economic data for the week was highlighted by higher retail sales, driven by energy prices, mixed regional manufacturing results, tempered inflation and jobless claims that rose slightly.
  • Equity markets in the U.S. and developed Europe declined last week, while emerging markets fared positively, as sentiment improved.  Flows away from risk and falling interest rates benefitted fixed income.  Commodities were mixed but were generally led lower by a continued decline in crude oil prices but a sharp spike higher in natural gas.

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Weekly Economic Update

Economic Update 11-12-2018

 

  • Economic news for the week included a FOMC meeting where interest rates were held steady, manufacturing ISM declined but remained strongly positive, and jobless claims continued to show labor market strength.
  • U.S. equity markets gained some ground last week, following the conclusion of the mid-term elections, while foreign stocks were mixed to lower on net.  Bonds were positive as interest rates declined a bit following the Fed’s meeting.  Commodities fell a few percent driven primarily by lows in crude oil, which is now in a bear market.

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