Economic Update 1-22-2015

• In a full week of economic releases, retail sales were somewhat disappointing (although cheap gasoline exacerbated the poor result), inflation declined dramatically due to cheaper energy costs, while sentiment improved to much higher levels.

• Domestic equity markets were weaker, while foreign names generally experienced positive sentiment from Europe. Bonds gained ground on continued declines in yield, which also benefitted REITs to some degree.  Oil prices stabilized somewhat at just under $50/barrel.

U.S. equity markets were generally down on the week as further concerns about the energy complex and global growth weighed on sentiment.  The defensive utilities and telecom sectors led on the week with gains 1% plus, while financials and technology fared the worst, losing several percent.  Energy stocks lost ground, but didn’t fall into the ‘worst’ camp last week, which was an improvement over recent trend.  Company earnings releases for the 4^th quarter have already started, so expect news to be focused on this for the next few weeks.

Foreign stocks outgained domestic issues last week, led by peripheral Europe on the developed market side, although core Europe was up several percentage points as well.  The reason?  The European Court of Justice essentially provided the go-ahead to the ECB’s plan of an all-out quantitative easing program.  This was a wildcard, as from a political standpoint, it was not a certain outcome.

India was the best-performing emerging market, as the World Bank reported that the nation’s GDP growth will expand to a 7% rate in 2017, becoming the world’s fastest-growing economy. This is on the heels of recent hopes of business-friendly reforms in that economy under a new administration.  (China is expected to be a close second at +6.9%; forecasts for global growth were also decreased, which didn’t help market sentiment).  On the more negative end, eastern Europe continued to struggle with Russia and low oil prices weighing down sentiment, but more specifically in Poland due to close mortgage market ties to Swiss banks (and denominated in francs) and would be affected by currency changes.

U.S. bonds experienced another strong week, as 10-year treasury rates fell 15 basis points.  Long duration governments fared best (and are leading so far year-to-date), as did developed European debt with hopes for ECB stimulus.  High yield and floating rate, unsurprisingly, were among the weakest areas of the week.  Foreign debt performance in general was mixed, based on currency impacts in a strong dollar week.

Real estate experienced another solid week, with U.S. REITs gaining almost +3%, but Europe and Asia also fared well.  U.S. healthcare and residential led the way on the week, while mortgage REITs lagged, despite lower interest rates.  Overall, tenant demand continues to look strong in this space, and our preferred measure of valuation (share price-to-underlying property net asset value) continues to point to valuations near or even a bit below fair value for high quality firms.

Commodity indexes fell about a percent on the week, in keeping with the equivalent strength in the U.S. dollar.  Precious metals, led by silver, saw very strong gains on the week, and natural gas and unleaded gasoline also recovered somewhat.  Wheat and copper were especially weak, being the losers for the period.  Crude oil experienced an up-and-down week, moving in a range of under $45 to $49, before ending on that higher side.  Everyone’s looking for a ‘bottom,’ and it remains to be determined where that bottom will fall.

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.