Economic Update 5-18-2015

• Economic data for the week was mixed, with weaker-than-expected retail sales numbers, decent employment metrics and conflicting sentiment data from consumers and small businesses.

• Global equities gained on the week, with international stocks outperforming U.S. names—due to a weakening dollar effect—both despite a lack of major headline data to move sentiment in either direction.  Global bond yields jumped mid-week but came back to earth, in both U.S. and foreign markets, which resulted in generally flat domestic returns and slightly better for foreign bonds, which benefitted from a weaker dollar.  Commodities rose a bit, with oil price stability and some gains in gold.

Stocks ended up higher on the week, with defensive consumer staples and health care leading the way, while cyclical materials and energy lagged, by losing over a percent each.  Small-caps outperformed large-caps slightly, bringing the year-to-date returns to nearly a draw between the two segments.

Foreign stocks outgained U.S. equities, although almost the entire effect was from a 1.5% weakening of the dollar—local returns were, for the most part, flat on the week.  Peripheral Europe led the pack, with the exception of Greece, which continues to be weighed down by debt concerns, although they’ve been making their payments with available cash as they continue to negotiate with the ECB and IMF for further loosening of their debt burden.  The Bank of England held their benchmark interest rate at 0.5%, while keeping quantitative easing in place.  More newsworthy, though, is that the Euzozone expanded by +0.4% in the first quarter, which is the fastest pace in two years.  Even more interestingly, the four largest Euro nations (Germany, France, Italy and Spain) all reported positive growth, which is the first time in half a decade that’s happened all at once.  QE was hoping to accomplish such growth, generate some inflation (which has now moved from negative to zero) and equities have performed in line with these partially-realized expectations this year.

U.S. bonds experienced rate volatility during the week, with yields on the 10-Year Treasury moving up to 2.3% again, before resetting back at the 2.15% level by Friday—close to where they started.  Consequently, total returns were relatively tempered, with most intermediate governments and corporates coming in flat.  Long treasuries suffered a bit more with the volatile rate action, losing just over a half-percent on the week.

The weaker dollar aided foreign bonds, since the more tempered returns in fixed income are more easily pushed around by currency changes.  European bonds especially have been in the news perhaps more than any other asset class as of late, with yields in developed Europe violently moving higher from negative or near flat levels (related to the reasons listed under equities just above). However, yields fell back to where they started after peaking mid-week, which helped stabilize foreign bond returns somewhat.

Real estate generally performed in line with equities, with Europe performing several times better than the U.S.  Year-to-date, foreign REITs have bucked the trend of the past year by coming back to life and outperforming U.S. REITs, with help from a weakening dollar as of late, improving conditions in Europe (albeit not outstanding yet) and hopes for more stimulus to keep Asia from falling into a deeper chasm.

Commodities gained about a percent, as measured by the GSCI, as oil bounced into the low $60’s and back into just under $60 by the week’s end.  Silver and gold were the big winners on the week, gaining over +3% as the U.S. dollar continued to weaken, agriculture came back slightly (with wheat bouncing back by over +5%, reversing a recent trend) while industrial metals lost about a percent on average.

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.