Economic Update 11-17-2014

• Economic figures last week were a bit better than expected, highlighted by a slight positive surprise in retail sales and decent sentiment surveys, which continued to post readings at high levels.
• Equity markets were just slightly higher on the week in one of the less volatile set of sessions in several weeks. Domestic bonds were little changed.  Oil prices continued to fall—affecting commodities markets and raising questions about eventual impacts in other areas.

Several markets were flattish to slightly higher on the week.  In U.S. large cap equities, technology and consumer discretionary stocks led with larger gains, partially related to positive comments from Wal-Mart regarding lower oil prices helping consumer spending power, while utilities and energy lagged in the negative.

Developed international stocks fared a bit better, led by Japan with almost 2% gains, upon reports of a likely delay in the second phase of a planned sales tax increase from 8% to 10%, while Europe ended up with index-like gains and the U.K. lost a bit of ground.  The U.S. dollar index was flat, so did not play into things for the first time in a while.

Chinese stocks gained several percent on the week as excitement began to build around the new Shanghai-Hong Kong ‘express’ stock exchange that opened this week, featuring a limited subset of the previously very limited access A shares for about 600 companies to foreign participants (up until now, generally the 180 companies listed in Hong Kong as ‘H shares’ have been the only available vehicle).  The key benefit is additional legitimacy from a regulatory standpoint, as the current Chinese market is lacking a few of these formalities and has a bit of a speculative element to it (much like the U.S. market did prior to the securities reforms of the 1930’s).  China would also like the renminbi used by a wider audience and such transparency could help.  Even so, this trading will feature foreign ownership caps as well as 10% volatility bands, in order to keep things from getting too out of hand.  On the other end of the sentiment spectrum, Brazil experienced one of the worst weeks, due to a corruption scandal involving one of the country’s largest oil companies/index members, as well as continued uncertainty about the re-elected president’s upcoming policies.

Bonds experienced one of their flattest weeks in some time with interest rates barely moving across the curve, which caused little price change for government and corporate investment-grade debt.  High yield lost some ground on the week with widening spreads.  Foreign debt, notably that in peripheral Europe, gained several percent on the week again with pressure on rates moving lower.

Real estate returns were strongly led by 5%+ gains in Japan, a sector which has benefitted from continued promises of cash inflows from the government’s stimulus package across a variety of asset classes.  European REITs also fared well, while U.S. names pared back a bit, led by weakness in office/industrial and retail.

Commodity indexes were down a few percent on average, due to their composition, but individually, were all over the board last week.  Agricultural commodities, such as sugar and grains gained several percent due to weather; and precious metals gained after reports of foreign buying.  Energy fell again with West Texas crude falling from $78 to $76/barrel, and natural gas also corrected after a large prior gain.  It’s important to remember the ‘overshoot’ qualities of any market, but especially asset classes such as commodities, that have the tendency to move in trend patterns.  Prices often get carried away beyond what fundamentals warrant, and snapbacks are notably frequent (often occur as headlines predict a ‘new’ paradigm).

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.