Economic Update 12-22-2014

• Last week’s domestic economic data were mixed.  Good news came from the stronger industrial production report in November and lower than expected jobless claims.

• Disappointing news came from December’s Empire manufacturing report, slightly worse than expected housing market data and November’s soft CPI report.

• Stocks rebounded significantly from the prior week’s slump, as depressed energy prices showed some signs of stabilization, the U.S. economy continued to strengthen, and the Fed expressed patience regarding the timing of rate liftoff.  However, bond performance was muted.  REITs delivered small positive returns that were offset by negative performance from the commodity markets.

Last week’s capital markets were mainly driven by what happened in the oil markets and what language the FOMC released at the end of its two-day meetings on Dec. 17.  At the beginning of the week, the Russian Central Bank was forced to hike its key interest rate by 6.5% to 17% to curb the rapid devaluation of the Ruble and surging domestic inflation.  Investors were concerned that depressed prices in oil markets and associated weakness in oil-exporting countries were likely to drag global economic slowdown even further.  It was not until the latter part of the week when investors’ confidence returned.  In light of the slow improvement on the labor market and the transitory effects of lower energy prices on inflation, the Fed pledged to be patient in its process of normalizing its interest rate policy.  The Fed also maintained its language of “a considerable time” to keep rates at current historical low levels following the end of the QE3 program in October.

Domestic equity markets rallied by the end of the week.  The S&P 500 index rose 3.4% to reverse its downward trend of the previous week and ending its year-to-date performance above 14%.  Small cap stocks outperformed both large cap and mid cap stocks.  Within the S&P 500 index, the energy and materials sectors rebounded the most, up 9.7% and 5% respectively.  The consumer discretionary and consumer staples sectors lagged the most, each only up by 1.7% and 2.1% respectively.

Outside the U.S., EAFE and emerging market stocks underperformed the domestic stocks as the U.S. dollar appreciated against most of the other major currencies.  The MSCI Pacific index declined 12 bps, 1.5% underperforming the MSCI Europe index.  Within the emerging markets, the MSCI EM Europe index declined 2.8%, lagging the MSCI EM Latin America index’s 3.8% return by 6.7%.

The BarCap U.S. Aggregate Bond index was slightly negative, down 27 bps.  Compared to the above 3% yield level at the beginning of the year, the U.S. 10-year Treasury yield slightly widened last week to 2.17% from the prior week’s 2.10% level.  As the markets approached the year-end holidays, light issuance supplies and thin trading volumes all contributed to the muted bond performance.

Measured by the Citi Non-U.S. World Government Bond index, foreign-developed sovereign bonds were down by 85 bps, lagging the emerging market bonds’ positive return of 1.6%.

U.S. REITs were up 1.6%, beating foreign REITs by 1.3% last week.  The WTI crude oil prices still traded at the depressed level of between $54 and $57 per barrel.  Commodity returns were negative, down 1.9% as measured by the Bloomberg Commodity Index (former DJ-UBS index).  It was slightly worse than the energy-heavy S&P GSCI Commodity index’s weekly return of -1.6%.

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.