Economic Update 8-17-2015

• Economic data on the week generally turned out mixed to better than expected, with positive results in retail sales and industrial production, while several employment metrics were a bit weaker.

• Despite weakness early due to concerns about the Chinese currency devaluation, markets rebounded to result in a positive week in the U.S., while foreign stocks generally lost ground.  Bonds were little changed as yields across the curve barely budged.  Crude oil prices fell in the U.S. by a few percent, while Brent crude and gold rose—resulting in just a slight decline in commodity indexes overall.

U.S. stocks experienced weakness early in the week, courtesy of the Chinese government’s decision to float the yuan lower by several percent (that we outlined the background of in the separate special ‘Question of the Week’ installment).  Additionally, the FOMC Vice Chair mentioned in a speech that he didn’t expect rate hikes until inflation returned closer to 2%, although this was outshined by the Chinese news.  This search for meaning in comments from FOMC members continues to act as a driver of near-term sentiment if anything remotely unexpected comes out in sound bites.

By the end of the week, returns for equities had recovered, with all sectors ending up positive.  Energy recovered to be the biggest gainer on the week, up +4%, followed by utilities; on the negative side, consumer staples and health care barely budged.  In blue chip news, Google announced that it’ll be restructuring itself as a company known as ‘Alphabet,’ which appears to be a play on the term ‘bet on alpha,’ more than the reference to letters.  In this form, it’ll provide better transparency from underlying business lines, including the classic search ad revenue, but also the Android platform, as well as the wackier ventures in biotech and driverless cars.  Markets appeared to like this additional layer of transparency.

Foreign stocks, on the contrary, lost ground, although they performed better in USD terms than not, as the dollar weakened on the week.  The much-maligned China A share market was the best-performing index, gaining several percent, while Greece and other European peripheries also gained ground to lead the pack.  While European GDP for the second quarter grew at +0.3%, a bit of a deceleration from the first quarter and slightly below expectations, Spain grew at a faster rate than France, leading the way.  Also, some of these positive sentiment no doubt resulted from approval of the 86 bil. euro Greek bailout package through a 3-year financing arrangement, in return for further reforms and cuts.  Losers, unsurprisingly, were Asian region nations with the most to lose from China’s currency devaluation and stronger export position, including Malaysia, Indonesia, and Taiwan.

U.S. bond indexes lost just a bit with interest rates virtually unchanged across the yield curve during the week.  Investment-grade bonds generally outperformed high yield, with oil prices weighing on sentiment for the energy sector.  Foreign bonds performed similarly in local currency terms, but more favorable when translated back to dollar terms.

On par with equities, developed Europe represented the strongest real estate returns, while U.S. returns were positive in several areas, including mortgage, lodging and residential/apartments.  (The U.S. apartment market continues to be one of the better performing assets of the year—up nearly +20% year-to-date on continued strong demand.)  Asian REITs brought up the rear with negative returns, hurt by the general concerns surrounding China.

Commodities again were mixed, with slight declines overall.  Crude oil prices fell -2% to about $42.75/barrel after pushing 6-year lows—driving overall index returns as usual.  By contrast, Brent crude gained, as did precious metals.  Corn and soybean prices fell by several percent on the week on anticipation of a bumper crop in the two harvests.

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.