Economic Update 7-20-2015

• In a busy week for economic reports, most came in a bit weaker than expected, including retail sales, manufacturing activity and business/consumer sentiment.  However, housing continued to experience an uptick.

• Stocks gained on the week globally with positive sentiment from improved situations in China, Greece and Iran.  Fixed income also performed well, with the mixed economic data and dollar strength which contributed to higher demand for bonds, creating lower rates

U.S. stocks gained on the week, with dramas surrounding Greece, China and Iran all lightening somewhat, taking a few bricks off of the usual wall of worry.  For Greece, parliamentary approval of austerity measures allowed going forward of a needed European bridge loan that would help cover financing needs for about three years and recapitalize the banking system (which reopened this morning).  Based on several watched metrics such as mutual fund cash levels, option put-buying, and ratios of bulls-to-bears, it appears that recent sentiment may have become a bit overly negative.

From a sector standpoint, technology and financials gained with strong returns on the week, while energy and materials lagged, in keeping with lower commodity pricing.  In fact, the tech-oriented NASDAQ reached a new record high.  While earnings are just beginning to come in, strong performances by Google, Netflix and a few mega-banks set a positive tone last week.  Overall, it’s expected that quarter-over-quarter Q2 EPS growth has improved from -5% to -3.5% or so—not a great absolute number, but has at least been moving in the right direction (notably, when the energy sector is excluded, growth transforms into an expected positive +5% for the quarter).  We’ll certainly have more on this front in the next few weeks.

Foreign stocks also gained, led by strong performances in India and China, but also in Japan and the U.K.  European stocks were higher, just less so, while Brazilian and similar commodity-heavy nations suffered on the week.  Positivity in China stemmed from government measures to stem the negative bear market spiral; in addition, Chinese GDP came in at 7% (miraculously close to target and two-tenths above expectations).  The service sector was a main driver, up over 8%—ironically, much of this appeared to be driven by high levels of financial brokerage activity.

U.S. bonds experienced a strong week with bond yields falling, despite strength in equities as well.  Despite the headline good news that helped stocks, weaker commodity prices, a stronger dollar and lackluster economic data likely helped.  Long treasuries and higher-quality corporates gained the most, while shorter-term debt was flattish to slightly negative, as would be expected.  The dollar rose about 2% on the week, which was a headwind for foreign debt, although some issues were able to overcome that hurdle, notably in emerging markets as spreads tightened along with a general risk-on sentiment.  While commentary in the U.K. was somewhat hawkish in terms of the likelihood of rising rate sentiment, rates were actually cut by a quarter-percent in Canada—who’s economy is much more commodity-sensitive.

Real estate was positive globally, with returns in developed Asia and Europe up several percent, in keeping with other equities, while U.S. REITs gained to a lesser degree.  Domestically, more cyclical lodging and industrial real estate led the way, while health care and residential lagged.

Commodities fell on average during the week, as crude oil prices declined -4% to just under $51—the lowest level since early April and the range-bound swings of February-March.  Industrial metals and natural gas gained, on improved China sentiment and hot weather, respectively, while gold reached a 5-year low by the end of the week as several global crises dissipated.  The yet-to-be-finalized Iran deal offers the potential for sharply increased oil production, including a doubling of exports (Iran exports limited amounts of crude now through various exemptions) coupled with an already potentially-oversupplied dynamic with U.S. shale becoming the world’s swing producer.  This will take time to play out, but with low-to-moderate global growth the current normal condition, keeping demand tempered, there could be more headwinds than tailwinds to crude pricing.

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.