Economic Update 10-5-2015

• Economic data last week was lackluster, but not too far from expectations, with ISM manufacturing staying in just in expansionary territory, while the employment situation report disappointed on the downside.

• U.S. markets gained on the week, with sentiment improving on net despite continued global growth worries; emerging markets performed especially well.  Interestingly, bond prices also experienced a positive week as interest rates fell.

U.S. stocks weathered volatility again on the week before rising higher by Friday (bucking some lackluster economic and jobs news along the way).  From a sector standpoint, materials and energy ran counter to recent trends by ending up as the best performers, while financials and telecom ended up in the negative.  Large-caps significantly outperformed small-caps, which struggled due to exposure to higher-valuation firms that have sold off more recently.  Coming weeks will offer earnings results for the 3^rd quarter, for which expectations have already been toned down dramatically, so the usual game of release vs. low estimates will likely play out again.  Interestingly, and not discussed in the media is the state of the S&P 500 by sector.  If the horrific energy sector is removed, and for good measure, materials as well, expected earnings growth for the other 8 sectors isn’t looking as terrible for 2015 as a whole.

The Federal debt ceiling was originally thought to be sufficient until mid-Dec.; now, it’s looking more like early Nov., based on estimated tax receipts and other flows.  Such a limit increase could be coupled with a highway bill extension or other legislation, but this remains to be determined, although it is widely conjectured that Speaker Boehner’s impending departure could actually smooth the process and lessen chances for a summer 2011-like disruptive debate.  It is tiresome to rehash this debate as has been the case the last several years, but it could certainly add a degree of politically-driven volatility towards that time if partisan politics over seemingly small (in dollar, larger in ideology) issues hold up this process.  Interestingly, the U.S. is the only remaining developed market nation to still have such a limit in place requiring periodic renewal.

Foreign stock returns, which were slightly negative in local terms, turned positive when translated back due to a weaker dollar.  Japan outperformed Europe and the U.K. in developed markets, even as Japan moved back into deflationary territory (raising hopes for more stimulus), while emerging market stocks were the leaders on the week, led by Brazil, India (with a rate cut deeper than expected) and China (H- but not A-shares), as Chinese PMI came in slightly better than expectations at 49.8, just barely in contractionary territory (50 is neutral of course).

Bonds experienced a solid week as risk assets lost ground again, taking the bellwether 10-year treasury under 2% again.  Long treasuries led the way, due to duration effect, while high yield bonds lost ground.  Foreign debt of all types generally performed well due to the weaker dollar on the week.

Real estate in the U.S. gained sharply on the week, led by residential/apartments, which could be related to the mixed housing releases; international real estate also gained.

Commodities were generally lower on the week.  Crude oil bounced around within a dollar or so of $45/barrel, before ending slightly north of that point—it’s been in a fairly tight range around that figure for the past month or so.  Natural gas declined sharply, while industrial metals experienced gains offset by weaker pricing in precious metals.

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.