Weekly Economic Update

Economic Update 3-23-2015

  • In a somewhat light week for economic reports, the FOMC meeting was the highlight—in which no action occurred, other than a subtle language change that stemmed the persistent rise in the dollar. Several housing reports showed lackluster results, but these could have been largely affected by extreme weather in the Eastern part of the country, artificially depressing activity.
  • Equity markets turned positive upon the Fed’s tempered language and references to moderation in economic growth (which could postpone a rate increase—pleasing to markets). Bond rates also fell back sharply on the news, which was positive for bond prices.  The weaker dollar served as welcome news for commodity prices.

In response to the Fed’s language following the conclusion of their Wed. meeting, the U.S. dollar index fell nearly -2%, the largest such move in six years, resulting in the worst full week performance for the dollar in two years.  This may have been part of the point, as continued strength in the dollar could certainly throw a wet blanket over U.S. export activity and earnings, while benefitting Europe and Japan (as the other primary traded currencies).  Keeping the possibility of rate increases somewhat at bay lowers the strong dollar risk somewhat.

U.S. stocks gained on the week, with small- and mid-caps outperforming large-cap blue chips.  Sector results were led by health care and utilities, while materials lost nearly a percent.  Biotech has been a strong contributor to returns in health care due to the combination of strong earnings (over +30% growth last quarter, several times that of the S&P 500), as well as M&A transaction activity and some interesting drug trial news for conditions such as Alzheimer’s.  In fact, almost all of the small cap strength this year has originated from the health care and tech sectors as well, with other segments performing largely in line with each other.  While perhaps not in bubble territory yet, this sub-sector continues to be one of high investor interest, along with social media.

Foreign stocks largely performed in line with U.S. equities in local terms, but outperformed when translated back for a weaker dollar.  Problem areas of the emerging markets, notably Turkey and Brazil outperformed with stronger risk-on sentiment (tied to the Fed), followed by peripheral and core Europe, while Asian equities lagged with slighter gains and less of a currency impact.

Bond prices gained, with rates falling after the FOMC announcement, which bought some time for those hoping for continued lower rates.  The dollar weakened a bit on the week, which gave a small boost to locally denominated foreign debt over USD-pay bonds, with the difference being about a percent.

Real estate experienced solid gains across all sectors upon lower interest rates and an accommodative-to-neutral stance from the Fed.  Additionally, underlying fundamentals continue to look strong in this segment, which is an intermediate-term positive.

Another positive from the dollar pullback following the FOMC announcement was a corresponding uptick in commodity prices (which tend to have an inverse relationship to the dollar), but the bump wasn’t enough to slow a largely negative week.  Precious metals gained a few percent on the assumed longer Fed timeline for easing (which lowered real interest rates—gold’s nemesis), while crude oil continued to look strained under high inventories in the U.S.  The WTI crude contract fell a bit on the week towards $40 before recovering again just above $46, as storage levels continue to build despite a slowdown in rig counts (producers can’t just flip a switch and turn off production).  Industrial metals also weakened generally with a still-strong dollar and less optimistic economic growth projections coming out of China, a primary consumer of these.

Period ending 3/20/2015 1 Week (%) YTD (%)
DJIA 2.13 2.29
S&P 500 2.67 2.86
Russell 2000 2.79 5.37
MSCI-EAFE 4.01 6.82
MSCI-EM 3.19 1.38
BarCap U.S. Aggregate 0.79 1.48
U.S. Treasury Yields 3 Mo. 2 Yr. 5 Yr. 10 Yr. 30 Yr.
12/31/2014 0.04 0.67 1.65 2.17 2.75
3/13/2015 0.03 0.68 1.60 2.13 2.70
3/20/2015 0.01 0.60 1.42 1.93 2.50

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. 

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