Economic Update 12-29-2014

• During the holiday-shortened trading week, we received some upbeat economic news: The Q3 real GDP growth rate was revised up significantly more than expected, consumer confidence reached the highest level in eight years, and seasonally adjusted initial jobless claims continued to edge downward.

• Amid positive economic developments, we saw a slightly disappointing durables report, some softness in the housing data and limited personal income growth versus the pace of consumer spending.

• A strong GDP report helped fuel last week’s Santa Claus rally.  Domestic stocks continued to swing up while the Dow topped 18,000 for the first time.  Foreign stocks slightly lagged behind, bonds retreated, REITs’ performance was up more than 1%, and commodities were down for the week.

Domestic stock markets continued their upswing after investors received the stellar news that final Q3 real GDP grew at 5% annualized clip – the fastest pace of growth in 11 years.  Including the Q2’s 4.6% pace, the six-month economic performance marked the strongest back-to-back quarterly growth rates since 2003.  The U.S. equity market extended the prior week’s sharp rally and had a nice Santa Claus run-up.  The Dow Jones Industrial Average index gained 249 points during the week and surpassed the 18,000 level for the first time. Meanwhile, the S&P 500 index almost touched the 2,100 level and went on breaking off its all-time-high closing record.  With dividend income, the S&P 500 index returned 15.3% for the year to date, on track to finish with its third double-digit return in a row.  U.S. value stocks outperformed growth stocks.  Small cap stocks outperformed both mid and large cap stocks.  Within the S&P 500 index, the utilities, consumer discretionary, telecom and consumer staples sectors led the market, while the health care and energy sectors retreated and had negative weekly returns.

Outside the U.S., EAFE and emerging market stocks lagged domestic stocks.  The MSCI Pacific index was up 64 bps, outperforming the MSCI Europe index by 26 bps.  Within emerging markets, the MSCI EM Europe index rallied the most by 3%, outpacing both the MSCI EM Asia and Latin America indices.

Bond markets slipped to slightly negative returns on the strong GDP report.  The BarCap U.S. Aggregate Bond index was down 19 bps.  The yield on the U.S. 10-year Treasury note slightly increased from 2.17% to 2.25% in the week.  Long-term government bonds underperformed.  Foreign-developed sovereign bonds declined 62 bps as measured by the Citi Non-U.S. World Government Bond index, lagging the emerging market bonds’ positive return of 0.33%.

Foreign REITs returned 1%, underperforming U.S. REITs by 25 bps in the week.  The energy heavy S&P GSCI Commodity index declined 2.62%, worse than the more diversified Bloomberg Commodity index by 62 bps.  At the beginning of the week, the IMF released its simulation analysis of the impact on the global economy from the recent oil price slump.  It estimated that faltering oil prices would boost the world GDP by 0.3 to 0.7% in 2015, on average pushing global economy’s growth rate above 4%.

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.