Economic Update 5-04-2015

• The economic picture last week was colored by a poor U.S. GDP release for the first quarter, as well as acknowledgment by the FOMC of slowed conditions.  However, other data, such as the ISM and Chicago PMI came in mixed to a bit better. Jobless claims are one stat that has continued to show improvement in the labor market.

• Interestingly, both stock and bonds experienced negative returns last week, as did real estate, upon worries of slower growth yet also rising interest rates. Commodities gained with a weaker dollar and continued higher pricing in energy.

U.S. stocks lost some ground on the week, although large-caps sharply outperformed small companies, which lost several percent.  However, the poor GDP report created a generally negative tone on the week, although remaining big earnings reports were generally neutral to positive, as in prior weeks.  From a sector standpoint, materials and energy were the clear winners, gaining over a percent each, while health care and cyclicals lagged by roughly the same amount.

Foreign stocks fared far worse than domestic names, although a decline in the dollar last week helped temper the impact somewhat in developed markets; emerging market currencies were generally little changed compared to the dollar.  Peripheral Europe performed well with talk of possible debt extension for the Greeks, which carried over into strong returns for Spanish and Italian equities, which bucked the trend of general indexes, while Europe overall was flat.  Japanese stocks lost significant ground, upon worries of slower U.S. growth and how it could carry over to their own earnings picture.

In contrast to the normal risk-on/risk-off trading, U.S. bonds lost ground with rising yields.  Bank loans fared better, as did shorter-duration issues, compared to longer-term government debt.  Foreign fixed income was mixed in both developed and emerging market regions, as interest rate policy continues to diverge around the world.

Real estate generally lagged, adding to poor results for the past three months, as higher interest rates and slow economic data weighed on the group.  Asian REITs bucked the trend; the sleeve in portfolios from foreign real estate helped temper poor performance from the domestic group over the past several months.

Commodities rose on the back of several segments, including industrial metals (namely copper, zinc and nickel) as Asian demand appeared to creep up.  Crude oil gained a few dollars to end the week at just over $59/barrel.  While sporadic trading continues, this represents nearly a +40% increase over the lows of $42.50 back in mid-March.  Refineries returning from maintenance lulls may account for some of the inventory drawdown, although it remains at high levels.  The well-worn saying ‘the best cure for low oil prices is low oil prices,’ certainly appears as appropriate now as ever.  Agricultural futures lost a few percent as crop supplies in several segments continued to grow.  Gold experienced a bit of a pop early in the week due to some unique circumstances before falling back to earth by Friday—apparently Venezuela ‘pawned’ $1 bil. worth of sovereign gold holdings to Citigroup for cash, to shore up the nation’s finances in light of much lighter oil revenues in recent quarter.  Even if this isn’t the start of a trend, it does highlight the pressures faced by some of the more dire emerging/frontier market nations.

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.