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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Fed Note

Fed Note:

The Federal Reserve Open Market committee decided to keep the fed funds target interest rate unchanged—at a level of 1.50-1.75%. This was widely anticipated as Fed committee members, through various speeches and other comments, have been hinting that they’re essentially ‘done’ with rate cuts for the time being, absent any further deteriorating data. Fed funds futures predicted a 98% chance of this outcome, while only a 65% chance of rates staying in this range next year through June, and 40% by next December (both dates feature increasing odds of at least one more quarter-percent cut). The vote was unanimous, with no dissentions.

The formal statement was little changed from the October meeting, noting the current policy was ‘appropriate’ for current conditions, with strength in jobs and household spending, but also weakness in business fixed investment and exports. The language also specifically mentioned the incoming data points of ‘global developments’ (i.e. trade) and ‘muted inflation’ (i.e. inflation is not high enough for their liking. The ‘dot plot’ showed no change in rates through next year, although these have been shown to have little predictive value.

The key decision items continue to show mixed results, which has made the Fed’s decisions as of late more complicated:

 

Economic data: GDP growth for the third quarter was upgraded slightly, to 2.1%, in line with the prior quarter. Expectations for Q4 continue to vary, from a low of under 1% to a trend-like 2%, based largely on the most variable inputs such as manufacturing data and export activity. Manufacturing sentiment surveys and actual industrial production have vacillated, but remain challenged. This is in keeping with corporate sentiment that continues to appear reluctant to take on capital spending projects in light of uncertainty surrounding U.S.-China trade, as well as how long this particular business cycle has progressed.

Inflation: Inflation continues to ‘struggle’, although year-over-year levels are coming in at 2.0-2.5%—right around the 2% Fed target. ‘Struggle’ is meant tongue-in-cheek, with a lack of inflation generally preferred by consumers over high inflation, while central bank policymakers tend to see a lack of inflation as a more ominous sign of growth concerns. The low trailing inflation rate is due to a variety of factors, including vacillating commodity prices and global trade, as well as technological change. The latter has tended to depress the price of consumer goods generally, especially when they’re not ‘quality-adjusted’. In short, the Fed has indicated that even if they don’t need to take rates any lower, they also won’t likely raise rates without signs of core inflation picking up. In this effort, the Fed has begun reviewing their internal methods of inflation evaluation, with possibilities like ‘average inflation targeting’ being eased in over the next few years, which would provide a construct for keeping rates lower for longer and ‘bring up the average’, so to speak. Inflation measurement is a nuanced operation, though, with prices for consumer goods, such as computers and TVs, having fallen dramatically over the past decade; on the other hand, healthcare and college tuition costs continue to rise at a far more troubling clip. Inflation seems to depend on individual budgets and demographic status more than broad averages, which is a source of increasing frustration with the Fed’s pinpoint focus on the 2% number.

 

Employment: The labor market continues to show steady strength, evidenced by the headline measures of a falling unemployment rate, decades-low jobless claims, and decent job additions. The pace of improvement has seemed to flatten, though. An overly-tight labor market can create its own set of issues, when skilled labor becomes harder to find, as the most qualified applicants are already gainfully employed. This can eventually erode productivity and slow down the engine of growth organically over time. For now, the positivity in labor markets would compel the Fed typically to err in the opposite direction, toward a tightening bias, as opposed to an easing one.

 

Stock and bond markets have each experienced a very strong 2019. This might have come as a surprise to many investors, especially considering the persistent trade concerns, but remains another example of equity markets, in particular, continually climbing a ‘wall of worry’. There has been a good deal written about the effects of monetary policy’s decreasing effectiveness at certain points, notably at low rates seen in the U.S., Japan, and Europe, following a decade of already-easy policy. Following the recent rate cuts, the Fed is left with even less ammunition for easing should a recession surface, since we’re now closer to the zero-bound. It has been presumed that fiscal stimulus would be a better tool than monetary policy in some parts of the globe, with the U.S. tax cuts already having been implemented. However, such policy has been more often used earlier in a cycle to gain traction at the end of a recessionary period, than it is to reach for ‘extra innings’ in an already-long cycle, when levels of debt have been floating higher. Data continues to reflect a lack of recession at the present time, but probabilities have been rising, with a fair amount of qualitative data (like sentiment) being trade negotiation-dependent. Valuations are higher for risk assets than they were in early 2019 (just after the late 2018 correction), but sentiment remains skittish, which a variety of market pundits remind us that historically has not been the sign of a market top, aside from the routine expected corrections.

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Weekly Economic Update

Economic Update 12-09-2019

 

  • Economic data for the week included a sharply better than expected employment report for November, as well as stronger consumer sentiment, yet weaker readings for both ISM manufacturing and services data, although the latter survey remained in expansion.
  • U.S. and foreign equity markets both gained, as trade optimism and economic results outweighed early pessimism. Likewise, interest rates rose, which punished government bonds but rewarded credit. Commodities gained as OPEC production cuts buoyed crude oil prices sharply last week.

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Weekly Economic Update

Economic Update 12-02-2019

  • In a shortened holiday week, economic data releases included an upward revision for Q3 GDP, stronger durable goods orders, lower jobless claims, and continued mixed but somewhat encouraging results in housing.
  • U.S. and foreign equity markets gained last week, with continued optimism about a potential trade deal coming to pass. Bonds were little changed, with U.S. fixed income outperforming foreign. Commodities lost ground overall due to lower prices for crude oil and natural gas.

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Weekly Economic Update

Economic Update 11-25-2019

  • During the week, several housing metrics continued to show improvement, although still a bit below expectations, coupled with positive consumer sentiment. On the other, the index of leading economic indicators declined again, reflecting a general tempering in economic growth.
  • U.S. and foreign equity markets declined last week, as optimism for a trade deal again waned. U.S. bonds gained, as the recipient of asset flows away from stocks, while foreign debt was held back by a stronger dollar. Commodities were down slightly, as declines in metals acted as more of an influence than the minimal change in the price of crude oil.

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Weekly Economic Update

Economic Update 11-18-2019

  • Economic data for the week included slightly higher-than-expected consumer and producer price inflation, positive retail sales and regional manufacturing data, while import prices declined.
  • U.S. equity markets ended the week as the best performers, with a positive showing, and outperformed mixed results in foreign equities. Bonds gained ground as interest rates fell back from recent peaks. Commodities were mixed with higher oil prices, but weaker showings from industrial metals and natural gas.

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