Economic Update 12-08-2014

• Several key economic reports came through last week, including better-than-expected ISM Manufacturing and Non-Manufacturing reports,
• Stock markets in the U.S. were generally higher on the week on better economic and employment situation report news, while bonds suffered under higher interest rates. Foreign equities and debt were mixed.

U.S. stocks moved higher during the week, with help from higher energy prices (compared to the previous week) and the stronger economic data.  Leading sectors on the week were financials and health care, while more defensive telecom and consumer staples lagged.

Foreign stocks were held back by a 1% increase in the value of the dollar during the week, which explains a portion of the negative returns.  Leaders included China (policy support hopes as well as creation of a new and well-received deposit insurance program) and peripheral Europe, which each gained several percent on the week, while Latin America (due to Brazil raising interest rates 0.50% to ward off inflation, despite stagnant growth) and Russia (now in recession) sold off sharply.

Bonds lost ground on the week with higher interest rates from the better economic data—the ‘belly’ of the curve was most heavily affected, but rates were generally higher across the board.  With duration effects, long bonds fared the worst, while floating rate and high yield held their ground a bit better, with lessened losses.  International bonds were mixed, with the strong dollar being a headwind, but some European debt actually gained ground with continued hopes for Euro easing.  Every time Mario Draghi speaks these days, the language is dovish and more dovish.

Real estate sold off a bit on the week, in keeping with higher interest rates.  The U.S. fared better than abroad, with industrial/office and lodging/resorts actually registering gains (and correlated to better economic and job numbers), while apartments and mortgage REITs lagged from a sector perspective (the latter with bond-like tendencies).

Commodities were negative by just over a percent, about in line with the dollar’s strength and energy prices.  The crude oil segment of the GSCI index lost a half-percent, which was nothing compared to the week prior.  On the positive side, precious metals (notably silver), nickel and wheat gained, while sugar and unleaded gasoline were the losers.

Some were especially interested in the gold market over the past few weeks, as Switzerland was considering a referendum (which failed) to increase and repatriate the nation’s gold reserves.  Gold reserves held within European national borders remains lower than one might expect, with stashes held in the U.S. and elsewhere, and the entire mix of who owns what is convoluted through the use of ‘gold swaps,’ or short-term borrowings of gold back-and-forth to satisfy ownership needs country-to-country.  As the measure didn’t pass, we’ll leave it at that, but is another example of gold’s odd and fickle place in the world’s commodity and currency markets.  As the current ‘currency wars’ continue, these types of political responses may crop up from time to time.

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.