Weekly Economic Update

  • Economic data points from the week were quite good, and showed a continued rebound of conditions. Inflation, as measured by CPI at least, rose at a tempered pace we’ve come to expect.
  • Equities and other risk assets were higher, with positive data economic data noted above and lack of geopolitical disruptions; bonds sagged on higher interest rates as a result of the same.

U.S. stocks experienced another positive week, with U.S. large outperforming other segments and foreign equity.  From a sector standpoint, financials and industrials outperformed while telecom and energy lagged with the weakest, yet still positive, returns.

Outside the U.S., returns were led by the larger emerging markets, with Russia, Brazil and India all gaining upwards of +2%.  Japanese and Chinese stocks were two of the rare losing regions on the week.  There certainly appears to be a shift towards higher levels of comfort in emerging markets, as economic conditions may have bottomed, while concern has risen in developed Europe due to lack of growth influences—recent returns reflect this evolution.

Bonds sold off on the week, with yields backing up from lows the prior week on stronger economic news and perhaps perceptions of the Fed minutes pointing to hawkishness.  As expected, longer duration/low coupon debt such as Treasuries felt the bulk of the pain, while shorter duration and floating rate debt experienced the largest boost.  Year-to-date, long Treasuries remain in the lead, but the majority of bond groups are in the positive.  The dollar strengthened by a percent or so, but foreign debt performed well on the week despite the headwind—especially European bonds—as lackluster economic data pointed to additional accommodative measures.

Real estate segments were generally higher, but by a smaller margin than broad equities.  Asian REITs bucked the equity trend in that region, gaining over a percent, followed by U.S. retail and residential, while European REITs lost ground—not surprising due to economy-related demand concerns.  Homebuilding stocks, technically part of the consumer discretionary group and not real estate, but often thought of in the same vein, gained almost +5% in line with stronger housing numbers reported earlier.

Commodities were led by strength in industrial metals (copper and aluminum) and corresponding weakness in precious metals, as a ‘risk-on’ appetite in other asset classes flowed through to economically-sensitive contracts.  Energy and broader agriculture were less affected during the week, although the WTI Crude contract fell from over $97 to just over $93/barrel, the lowest point since January.

Interestingly and maybe not surprisingly, mutual fund flows appear to have neutralized between stocks and bonds again.  Investors seem uncertain about where to turn, and surveys of investor sentiment seem to confirm this.  Questions overheard from investors lately include some of these conflicts.  The economy seems to be getting better, so should I invest in stocks?  Or, since stocks have run up dramatically from where they were in 2008-09, am I too late?  Bond rates sure seem low but what if the economy falls apart again?  We’re sure you’ve overheard similar sentiments.  True, decisions aren’t as easy these days with valuations not bargain-basement levels, but that reflects the increasingly ‘normal’ non-crisis environment.  If folks were much more confident and even exuberant about risk assets, we’d be much more concerned about where we are in the cycle.  But, that skepticism coupled with positive plod-along growth could offer markets more time than seems to be currently feared.

 

Period ending 8/22/2014 1 Week (%) YTD (%)
DJIA 2.10 4.18
S&P 500 1.75 9.02
Russell 2000 1.65 0.50
MSCI-EAFE 0.76 1.93
MSCI-EM 0.80 8.02
BarCap U.S. Aggregate -0.22 4.43

 

U.S. Treasury Yields 3 Mo. 2 Yr. 5 Yr. 10 Yr. 30 Yr.
12/31/2013 0.07 0.38 1.75 3.04 3.96
8/15/2014 0.03 0.42 1.55 2.34 3.13
8/22/2014 0.03 0.53 1.68 2.40 3.16

 

 

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.

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