Economic Update 9-21-2015

• The week was highlighted by the Fed’s decision to keep interest rates at zero for yet another meeting, despite growing expectations for an increase.  Retail sales results were stronger, as did jobless claims, but several regional manufacturing surveys came in weak.  CPI was little changed, as expected, and remained at low levels.
• Large-cap U.S. equities were largely negative on the week, while small cap and foreign equities turned in positive results.  Investment-grade bonds offered slight positive returns as rates declined upon no action from the Federal Reserve.

U.S. stocks started decently on the week but ended lower after the FOMC statement alluded to worries about non-U.S. conditions—which fed global economic growth fears.  Small caps, which tend to have less foreign exposure, bucked the trend by finishing in the positive.  From a sector standpoint, more defensive utilities (which also reacted to a lack of interest policy change), consumer staples and healthcare actually gained ground on the week, while financials and materials lagged.

The dollar weakened, which acted as a positive for foreign stock and bond returns.  Coming in negative, on par with domestic equities in local terms, developed market returns in Europe and the U.K. turned positive when translated to dollar terms.  Japan remained negative, affected by a credit downgrade noted in further detail below.  Emerging market stocks rallied on the week, in fact over a percent in the hour after the FOMC meeting, which is unsurprising considering the possibly exaggerated fears of a rate hike being detrimental to EM.

U.S. bonds performed positively on net with threats of higher interest rates being put off for at least another month or three, if not longer, with most conventional investment grade sub-sectors gaining up to a half-percent.  Emerging market debt was also higher in price (again, with alleviated fears about the impact from Fed tightening) while high yield fell back a bit upon continued concerns over the energy sector component and global economics, which widened out spreads.

Interestingly, on the foreign bond side, S&P cut traditionally well-regarded Japan’s long-term credit rating from AA- to A+ based on the perception of continued difficult economic growth and fiscal reform headwinds and government decision to not step up additional QE-style asset purchases.  Japan’s debt-to-GDP ratio of over 200% is one of the highest in the world, not thought of as a major concern due to the fact that the ‘character’ component has never been questioned, and the bulk of Japanese debt is domestically-owned.  However, the ‘capacity’ to service such debt over the long run can also play a key role in credit ratings.

Real estate in the U.S. performed significantly better than other equities, likely assisted by the lack of Fed rate increase, as healthcare, retail and industrial/office all performed well.  Domestic names all out earned European and Asian REITs, which were positive but to a lesser degree.

Commodities were generally lower despite the weaker dollar.  Brent crude lost several percent more than West Texas intermediate, while natural gas also declined sharply.  Industrial metals lost ground on global economic concerns, while gold and silver gained a few percent with a respite from rising rates which tends to pressure the precious metals group.

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.