Economic Update 7-27-2015

• It was a very slow week for economic news, but included a strong showing from housing and jobless claims—two series which have shown improved strength as the recovery moves along.

• Equity markets lost ground on the week around the globe, while bonds benefitted from the risk-off environment and lower interest rates.  Commodities continued to struggle along with lower oil pricing and concerns over fundamental demand from China.

U.S. stocks were largely lower on the week, with no specific newsworthy catalyst at play globally; however, forward-looking guidance on the industrial and semiconductor side looked a bit softer than expected.  From a sector standpoint, consumer staples and discretionary led by losing just under a percent (the latter led by a strong earnings report from Amazon), while materials, energy and industrials all lagged with the most severe negative returns.  The materials segment continued to be affected by concerns over economic growth demand in China and other emerging markets.  The S&P blended earnings growth rate for the quarter also improved to just under -2%, which is much better than originally anticipated months ago.  The index ex-energy, which is as relevant recently, shows a gain of 4%, as firms with significant sales in the U.S. have been strongly outperforming those with higher foreign exposure.

If you can see a trend here (and it becomes more visceral when earnings reports come out), it’s one of major technology-driven providers creating important structural efficiencies unimaginable just a few years ago, from software/data housing to media to banking to online retail.  We will likely address this more fully at another time, but there are major shifts that appear to be occurring, with ramifications on the rate of change and prospects for ‘traditional’ businesses.

In foreign markets, a slightly weaker dollar helped returns a bit.  Peripheral Europe led with minor losses in Italy and Spain, along with Japan, while larger nations fell in the middle of the pack.  Once again, emerging markets suffered—although the pain was primarily focused on commodity exporters, such as Brazil, Russia and South Africa.

U.S. bonds gained with long rates falling about 10 basis points.  Naturally, longer duration governments gained a few percent on the week although results remain in the red year-to-date.  European bonds gained along the same lines as U.S. treasuries, while spreads widened for U.S. high yield and emerging market debt, negatively affecting returns.

Real estate appeared to be helped by falling rates on the week, as U.S. performed slightly better than developed Europe and Asia.  Domestically, healthcare recovered with positive returns, while more cyclical lodging and resorts fell back.

Commodities declined over -4% on the week—continuing a trend of softness.  In fact, the Bloomberg (formerly DJ-AIG, formerly DJ-UBS) Commodity Index has reached its lowest level since 2002.  Almost all contracts lost ground, although industrial metals performed better than average, despite the continued uncertainty about China’s economy.  Gold continued its longest losing streak in 20 years, with 10 straight days of losses and a 12-year low in net futures length, based on lower demand in China and globally and dollar strength.

Oil continued to slip backward, falling below $50, due to continued high hopes over Iran’s re-entry into world energy markets and an continued supply glut, namely in the U.S.  This represents a $10/bbl. (almost -20%) decline over the past month.  These spot prices and front-month futures contracts bore the brunt of the drop, however, as longer-term contracts remained pegged to the $65-70 price range—nearer to long-term expectations.  These dynamics play out in global currency markets especially—with lower commodity prices affecting exporters Canada, Australia, Brazil and Russia specifically, being a mixed bag for the U.S. dollar (although more positive than negative) and being a general positive for India and China, who tend to import energy.

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.