Economic Update 3-30-2015

• Last week’s economic data was relatively lackluster, with sporadic results from durable goods, while housing came in similarly to slightly better than expected. Inflation remained slightly negative on a headline basis and below-average on a core level.

• Equity markets generally lost ground on the week, with developed foreign indexes faring better than domestic. Bond prices and yields were generally flat on the week with minimal significant news spurring action in either direction.  Commodities gained a bit on a weaker dollar and higher oil prices.

U.S. stocks were down on the week with an absence of inspiring news and lackluster economic reports.  Conditions toward the end of the week were helped by Janet Yellen’s reassuring words during a speech that a gradual interest rate rise over the next few years is ‘appropriate.’  We get the message, but markets can’t seem to hear enough of it.  Consumer staples and energy lost the least, under a percent, while technology and financials lost the most ground.  Staples stocks were helped somewhat by the $40 billion takeover of Kraft (which gained +35% on the news) by the partially Warren Buffet-owned Heinz—among the largest of a string of M&A transactions of the past year—in creating the world’s fifth largest food/beverage company.

It was a mixed week for foreign equities, with segments of peripheral Europe ending up with positive returns, Japan flat, and core Europe just slightly negative.  The U.K. lost several percent as inflation fell to zero, creating some concerns over growth conditions.  Brazil continued to deteriorate, with sharp losses, dragging down emerging market indexes generally, although there were decent individual performances—again reminding us that it’s difficult to categorize this as a homogeneous group.  Over the past six months, foreign nations that have lagged most dramatically are those most sensitive to oil exports, such as Canada, Mexico, and of course, Russia, while non-energy sensitive nations haven’t been harmed nearly as badly.  Obviously, strong QE measures and hopes for improvement abroad have resulted in strong returns for Japanese and European equities—outperforming domestic names year-to-date, just when the point of frustration for foreign stocks seemed to reach an apex towards the end of last year.  An interesting reminder about the fact that markets don’t necessarily need ‘great’ news, but do react to news that’s just a bit better than previously expected.

Core U.S. bonds were generally flat with minimal changes in interest rates, as weaker durable goods orders were offset by lukewarm demand for newer treasury auction issues later in the week.  On the positive side, high yield and bank loans fared slightly better than the broader index, partially aided by improvement in energy prices.  Foreign debt was mixed with developed market bonds showing minimal losses, which translated into small gains due to a stronger dollar.  Anecdotally, concerns over a bond default for Brazilian oil firm Petrobras were lessened following regulatory action as well as S&P’s maintenance of a BBB rating for the nation’s sovereign debt, after last year’s downgrade and recent moderate political turmoil.

Real estate in the U.S. fell in line with general equity markets, while Japan and Asia generally gained, bucking the trend.

Commodities gained slightly with help from a falling dollar.  Crude oil moved up +5% on the week, ending near $48.50 after extending beyond $50 temporarily, as events in Yemen raised a few geopolitical concerns.  Gold also gained on the week with some lower dollar impact, while several agricultural commodities lost ground.  Wheat in particular fell -5%, in line with improved weather in Russian growing areas and the possibility that increased supplies will spur the Russian government to lift grain export restrictions.

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.