Economic Update

• Economic data was mixed early in the short week, but several industrial indicators remained in positive territory and the Friday employment report boosted investor spirits.
• Stock markets gained on par with stronger sentiment.  In line with this expected strength, bond yields rose sharply, creating a bad week for fixed income.

In a four-day trading week, U.S. stocks continued their upward movement, with the Dow reaching the round 17,000 level—so no doubt extra media attention than usual.  The S&P is also near a round 2,000 level, which would continue to generate headlines and perhaps more retail investor interest.  It’s often easy to forget that the majority of Americans don’t track the investment markets on a daily basis like many of us do, so are only reminded of their success or lack thereof by their mention on the news.

From a sector standpoint, cyclical sectors technology and consumer discretionary outperformed, while utilities and energy underperformed.  In coming weeks, we’ll talk a bit more current market levels and valuation (hint:  valuation remains ‘fair,’ while sentiment has started to improve with these headline numbers being reached, although not to the level where investors seem excited about stocks.)

Outside the U.S., returns between developed and emerging markets were generally indistinguishable on the week.  In developed nations, U.K. led with 2% gains, while Europe and Japan were closer around the EAFE average, which was brought down overall by Australia.  Overall, foreign returns from China and India led, up 3-4%, while the lowest returns came from Brazil/Latin America and Turkey; the latter was due to higher-than-expected inflation, no doubt due to the proximity to Iraq, as well as some odd comments from the prime minister that puts to question the level of objectivity of the central bank (we only mention these details as they highlight the country-specific ‘quirks’ some emerging markets struggle with).  The Chinese purchasing managers’ index gained for the second straight month (now at 52.4), which spurred sentiment.  European PMI fell a bit last month, but remained in expansionary territory.

Bonds struggled on the week, with rates rising on stronger economic and jobs data.  Accordingly, U.S. floating rate, high yield and shorter-term credit provided the only positive returns, as long bonds lost up to several percent on the week (amazing what a few basis points can do on the long end of the yield curve).  Abroad, German bonds and USD-denominated emerging market debt fell back, while local EM bonds, Australia, Canada and the European periphery shined with marginal gains.  With rates at 3.0% last December, many investors were eagerly awaiting conditions to improve and rates to rise back towards ‘fair value’ levels of somewhere in the mid- to high-3’s.  Now…with traditional bonds/bond funds performing on the strong side this year, it’s easy to look in the rear view mirror and look for what could have been.  However, with rates now back down to 2.65%, investors have to weigh the pros and cons of potential yield gained by going out further on the curve versus interest rate risk should this ‘fair value’ yield be achieved…

In real estate, returns were led by Europe and developed Asia, on par with equity markets, while U.S. sectors also experienced positive results, with the exception of residential.  Some of this could be the result of pushback from stronger housing results in recent weeks, which puts a question mark in front of investors hoping for continuing improvements in rental demand growth.

Commodities were mixed on the week, with industrial metals leading (nickel and copper in particular), gold and silver up a fraction of a percent.  Crude oil fell about 2%, under $105 as supply disruptions in Iraq seemed a more remote possibility.  Additionally, grain prices were down as the USDA estimates a record corn crop this year; there appears to be a bit of an oversupply in wheat, corn and a few other items, which has driven prices down in recent months.

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.  FocusPoint Solutions, Inc. is a registered investment advisor.