Economic Update 11-4-2014

It was a headline week, but not necessarily dramatic, as the conclusion of the FOMC meeting resulted in the taper ending as planned, and results of 3^rd quarter GDP showed that economic growth was a bit better than expected.  Confidence improved, while housing was again mixed.

Markets ended October by experiencing another solid week, with global equities gained sharply, while traditional bonds fell back a bit due to the ‘risk-on’ sentiment.

U.S. stocks experienced a positive week, with GDP better than expected and corporate earnings coming in without any major disappointments, taking the S&P now up over +11% from its mid-Oct. lows.  Small-caps continued their recovery vs. large-caps and again look a bit more expensive (they never seemed to get cheap).  From a sector standpoint, technology and financials (telecom technically won the week with a +4% gain, but that’s only a handful of companies) led the way, while materials lagged with only a minimal gain as the mining segment sold off.

Japan outperformed all markets on the week, gaining +7% as, on Friday, the Bank of Japan announced another round of stimulus (although through a close 5-4 vote), raising the 60-70 yen program to 80 yen (about $725 bil.), in efforts to head off deflationary impulses—this spurred another round of late-week euphoria.  The purchases are set to take place in bonds, REITs and ETF holdings.

Emerging markets fared a bit better than developed, as Brazil bounced back a bit from the prior week’s election-based disappointment and China also fared well, after the creation of new free trade zones and improved access to local securities markets being proposed.  On the other hand, oil-based Scandinavia fell, and Greek stocks suffered in the aftermath of the bank stress test noted earlier.

Bonds were a bit weaker, in keeping with the risk-on sentiment back into equities, with most of the damage occurring in the middle part of the yield curve.  Floating-rate held up better than most traditional areas.  From their depths a few weeks ago, 10-year Treasury yields have almost recovered by about 0.50%.  Aside from the currency impact of a stronger dollar, European peripheral debt and emerging market bonds ended up with positive returns as ECB bond-buying buoyed hopes and spreads for risky assets contracted, while foreign debt in local terms lagged.

Real estate assets were led by Japan, which gained +8% upon BOJ quant easing which involves real estate.  U.S. REITs were also positive, in line with equities, led by lodging, regional malls and residential, while retail and industrial/office have lagged.  All domestic segments are up 25-35% year-to-date, although valuations remain near fair value levels.

Diversified commodity indexes were generally higher, despite the stronger dollar.  Leading were several industrial metals as well as grains, which may have been oversold somewhat and could be at risk with potential Australian drought conditions.  Crude oil prices moved within a tight range on the week, but ended close to where they started at $81.  Goldman Sachs dropped their 2014 forecast to $75, which may have eroded sentiment somewhat.  Gold was a particularly poor performer, losing several percent, as a risk-on element in equity markets and the ending of U.S. quantitative easing removed some fears.  Why?  More QE adds to an already high U.S. debt load, so policies that temper the addition of more debt added to the upcoming thoughts of higher interest rates are seen as a round-about positive—gold doesn’t react well to positive things happening in the world.

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.