Weekly Economic Update

Economic Update 9-14-2015

  • In a relatively light week for economic data, producer prices came in flattish, on par with tempered inflation trends, while some sentiment data weakened a bit, as expected due to market volatility recently.  Labor measures, including JOLTs and jobless claims, continued to show improvement to the point of looking ‘normal.’
  • Volatility continued to be the new normal for global equity markets, with it ending positively for equity markets.  Bonds lost ground in a risk-on week and higher interest rates.

U.S. stocks bounced back after the Labor Day holiday with strong results.  Despite additional weakening in China’s trade balance, the government approved a large chunk of money for railway projects, expressed that it will move ahead more quickly on fiscal reform actions as well as push through additional stimulus-oriented public works projects—these all improved sentiment. Unique compared to many others nations is China’s ability to actually fund these projects with a large bucket of funds, which has been the primary backstop for investor soft landing hopes—most emerging nations don’t have this luxury.

U.S. markets ended up higher, led by technology and health care, while energy ended up as the only losing sector, reflecting weaker pricing in crude.  Year-to-date, health care and cyclicals remain the two positive industries by total return standards, while energy remained the weakest by far, showing a -20% decline in 2015 and remaining the dragging influence on S&P earnings.

Apple, the largest company by market cap in the world, completed its annual marketing event, where new iPhone, iPad, TV and other items were unveiled.  Unfortunately, the marginal changes for these types of products are becoming a high bar to surpass each year, so analysts generally remain unimpressed since nothing earth-shattering was rolled out.  We’ve discussed this before in terms of technology productivity, in that marginal improvements in already-advanced products are becoming increasingly difficult.  Moore’s Law of computing continues to work, defying expectations, but ‘fast’ to even ‘faster’ is becoming more difficult to notice at first glance, although making functions use even fewer keystrokes, improving camera quality and enhancing graphics capabilities are there to fill in the gap.

Foreign stock returns in developed markets lagged when measured in local currency terms, but when translated back from a weaker dollar, they ended up largely similar to those in the U.S. Volatility in Japan was also felt during the week, as GDP came in at a negative -1.2% for last quarter, but was tempered by a strong +8% rally upon news of Prime Minister Abe seeking to lower the corporate tax there by over 3%.  Additionally, European GDP figures came in a bit better than expected, helping from a sentiment standpoint there as well.

U.S. bonds were slightly weaker as interest rates ticked upward from last week by a few basis points, with longer-duration bonds suffering the most damage.  Best performing areas were high yield corporates and foreign bonds in U.S. currency terms, with a weaker dollar.

Real estate generally gained a few percent, on par with equities overall.  More cyclical lodging/resorts and industrials led the way in the U.S., while gains in Asia and Europe were positive, but to a lesser degree.

Commodity indexes were mixed on the week.  Agriculture and industrial metals gained several percent, led by gains in sugar, corn and copper, while energy and precious metals moved in the other direction, losing ground.  Crude oil declined -3%, falling back below $45 by Friday, with continued demand weakness and oversupply conditions.  Closely-watched Goldman Sachs cut forward-looking estimates again for 2016 from $57 to $45, based on oversupply conditions and production growth beyond what they expected, and even brought up $20 as a bear case scenario, although noted as far less likely than the base case.  This type of sound bite could well have affected trading sentiment last week, but based on experiences in recent years, we all know how difficult to get right these targets can be.

 

Period ending 9/11/2015 1 Week (%) YTD (%)
DJIA 2.13 -6.11
S&P 500 2.13 -3.34
Russell 2000 1.94 -3.05
MSCI-EAFE 2.07 -1.98
MSCI-EM 1.76 -16.08
BarCap U.S. Aggregate -0.12 0.67

 

U.S. Treasury Yields 3 Mo. 2 Yr. 5 Yr. 10 Yr. 30 Yr.
12/31/2014 0.04 0.67 1.65 2.17 2.75
9/4/2015 0.02 0.71 1.47 2.13 2.89
9/11/2015 0.04 0.71 1.52 2.20 2.95

  

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. 

 

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