Economic Update 2-16-2015

• In a moderately quiet week for economic releases, retail sales disappointed last month on a headline level due to lower gasoline prices. However, price recovery in recent weeks may have weighed on fickle consumer sentiment.

• Global equity markets gained ground on a variety of geopolitical events (Ukraine, Europe/Greece) resulting in better sentiment. Bonds lost ground on higher interest rates, notably on the longer-end of the curve.  Commodities experienced another positive week with continued stabilization in energy prices.

U.S. stocks performed positively again on the heels of better-than-expected corporate earnings reports, optimistic news from Europe (for both the Ukraine cease-fire and Greek debt negotiations) as well as additional stability in the price of crude oil..  Believe it or not, the S&P again hit new highs.  From a sector perspective, tech was the best-performing group, due to perhaps some positive commentary from industry leadership, while energy and materials also gained ground on stronger sentiment and oil stabilization.  Utilities were the sole loser again, down several percentage points, not helped by another rise in interest rates.

Affecting sentiment globally, but more directly impacting Europe, were the discussions between the Greeks, who hoped for easing of fiscal austerity measures and additional write-downs in debt principal, and the Euro leadership, who naturally resisted.  The ECB has authorized 5 billion euro worth of emergency lending assistance by the Greek central bank while this plays out, which appears to show more solidarity than isolation.  The expected outcome is that Greece may be allowed to run a smaller primary budget surplus, while a significant additional debt write-down looks less likely.  A spokesman for the Greek PM pledge to do ‘whatever we can’ to reach a deal with the nation’s creditors.  It’s clear than neither the Euro leadership or Greece has any desire or intention of leaving the currency union; however, the outlying risk as this point remains a misstep, misquote or other miscalculation that could box one side or the other into a political corner.  Based on current interest rate spread levels, it appears the probability being priced in of a Greek exit (we hate to bring up the overused ‘Grexit’) at about 40%.  This hovered at about 10-20% during the Great Recession and spiked up to almost 100% back in 2011—so obviously, the odds can be overdone.

Accordingly, Greece and peripheral Europe gained sharply on the week, as did Russia, with the oil price stability theme.  European GDP came in at +0.3% for Q4-2014, which wasn’t great, but it was positive, so a bit of positivity may have originated from this as well.  Japanese stocks gained over +2% in a week in which Prime Minister Abe declared he will make the most drastic changes since the end of World War II to bolster the economy, which reached into areas such as agriculture, the role of women in the workforce and social security.

Domestic bonds experienced a second-straight week of losses, as rates moved upward across the yield curve—mostly on the longer-end.  High yield and short-duration bonds bucked the trend with positive results.  The dollar index fell back on the week, which lent a hand to locally-denominated foreign bonds.

In keeping with equities, European real estate led the week with strong gains, with Japan not far behind.  U.S. REITs offered mixed results, with industrial/office names slightly positive and retail/malls negative.

Commodity markets gained despite a stronger dollar, and continue to be highlighted by oil—which gained several percent on the week—during a search for a bottom and mixed hopes for some stabilization in price.  However, the usually-volatile natural gas group gained nearly +10% on upcoming blizzard warnings in several states and the unleaded gasoline index gained +15%.  Gold and several industrial metals generally declined on the week.

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.