Economic Update 8-03-2015

• Economic data last week was highlighted by a lukewarm GDP report, mixed housing and consumer confidence surveys, but more positive near-term industrial reports.  The FOMC meeting statement didn’t offer any radically new insights, as expectations for an initial rate hike continue to be focused on later this year.

• U.S. equities performed positively on the week with decent earnings reports, and foreign stocks were largely in line.  Bonds also gained as investors apparently felt comfortable with the Fed’s current hints on interest rate policy.  Commodities suffered additional losses this week, as crude oil fell below $50/barrel, ending a painful July for the energy patch.

U.S. stocks gained just over a percent on the week, mostly due to results on Tuesday, as the rest of the week was generally lackluster.  Earnings appear to have been the primary catalyst for sentiment in the U.S., last week, as results from Ford and UPS spearheaded some early gains.  However, the picture has been mixed overall.  From a sector standpoint on the week, utilities and industrials outperformed, while energy and financials underperformed.  Markets have continued to trade in a relatively narrow range over the last several months, as no major ‘breakout’ items have surfaced on either the upside or downside.
Last week represented the last big earnings week for Q2, with over 70% of firms in the S&P 500 having reported.  For the quarter, the S&P total earnings growth figure was negative, at -3%, while excluding energy, that radically improved to positive growth of +4%.  Results have been decent, with 50% of firms reporting earnings surprises.  Of course, the bar is set low, with downgrades having been in place on an ongoing basis for recent months.  On average, health care and consumer staples firms have performed the best over the period, while tech, industrials and some other cyclical areas lagging.

Outside the U.S., many developed markets, including Japan and Europe performed in line with the U.S., while Australia, Brazil and Mexico surprisingly performed well, despite the commodity sensitivity.  Brazil has been fighting several headwinds, including a corruption scandal, but these are almost cast aside as ‘normal.’  Chinese stocks (both ‘H’ shares and local ‘A’ shares) continued to be the laggards, losing several percent on the week and over -10% in July, although year-to-date returns remain positive—the A showing a lot more volatility than the H.  Debate continues about the role of the Chinese government’s interventions into the local market, and whether market forces are being allowed to prevail.  No doubt more to come in this emerging area, coupled with Chinese growth concerns taking over as the key global area of worry, taking over for Greece during the past few weeks.

U.S. bonds fared well with falling rates as investors were assured in a tempered Fed response, apparently from the tone in their statement.  Longer duration bonds outperformed, while intermediates including high yield debt performed decently.  Currency movements were not a big factor last week, as developed and emerging markets performed largely in a similar range as U.S. bonds.

Real estate assets rose in keeping with broader equities.  U.S. REITs generally outperformed foreign, with lower interest rates helping somewhat.

Commodities suffered another lackluster week.  West Texas Intermediate Crude ended the week a bit lower than where it started—just above $47 a barrel—as energy vied with agriculture as the worst-performing sub-index.  Precious metals were the sole exception, gaining about a percent, breaking a recent losing streak as interest rates remained contained.  Crude oil spot prices fell just over -20% in July alone, as supply concerns continue to fester; this was the primary negative driver for commodity returns in the period, as most other segments fell, but to a far lesser degree.

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.