Economic Update 11-16-2015

•   In a light week for economic data, retail sales disappointed somewhat while consumer sentiment and jobs/claims data remained strong.  Producer prices fell, especially on a year-to-year basis, which continues to reflect non-inflationary pressures throughout the system.
• Equity markets fell back sharply on the week due to a number of economic and earnings-related factors.  Bonds fared slightly positively in the risk-off environment, as interest rates generally fell, with foreign issues outperforming domestic.  Crude oil prices declined dramatically, back towards $40/barrel upon ongoing supply concerns.

It was a sharply negative week for U.S. stocks, due to some weaker earnings results in certain key sectors (such as technology and consumer goods retailers later in the week), mixed economic data and more volatility in energy.  This was all coupled with growing probabilities of a Fed rate increase in December, the fire for which was stoked by comments seemingly in favor of hikes by several FOMC members during the week during routine public appearances.  From a sector standpoint, defensive utilities led the way with slight positive gains, while energy suffered the worst, along with major declines in crude.  With equity ‘beta’ generally driving things, large caps held up better by a few percent than did smaller-caps, which have lagged on a year-to-date basis—coupled with higher valuations and more leverage generally, at least from an index basis.  It’s important to remember that at least a quarter and up to a third of small-cap companies have no earnings, which can complicate analysis.

Market breadth, or lack thereof, has also been a point of discussion lately by some analysts.  When looking at the S&P this year, five companies (specifically, Amazon, Alphabet-formerly-Google, Microsoft, Facebook and General Electric) have accounted for almost all of the year-to-date returns.  Without these five, the market would be at a -2% loss.  While there certainly has been a focus on a certain number of mega-caps, this group represents almost 10% of the index’s overall market cap, so they’re bound to have a significant effect.  On the positive side, these periods of narrow breadth don’t last forever, and have historically not been especially meaningful of forward-looking market results, other than investors favoring companies that were of higher quality to a certain degree.

There was more differentiation in foreign stock returns last week, with Japan actually gaining a few percent, while Europe and the U.K. fell, although not to the same degree as the U.S. (The Paris terrorist attacks occurred after markets had closed.)  European GDP for Q3 came in at +0.3%, the 10^th consecutive quarter of expansion, despite not being at the pace desired.  This is despite large emerging market index components China and Brazil experiencing surprisingly tempered losses.  In China, what appeared to be some strength in the services sector was tempered by weaker results in the manufacturing segments (much like the scenario seen in the U.S.), coupled with weaker inflation under 1.5% and lower exports.  The heavier drawdowns were focused again on commodity nations, such as Russia, South Africa and Norway, especially as oil prices plummeted.  Greece was one of the worst-performing markets on the week, in keeping with recent protests.

U.S. bonds experienced positive results as ‘risk-off’ sentiment lowered interest rate across most of the curve (except for the T-bill end).  As expected, long treasuries experienced the most benefit, while high yield and bank loan areas lost up to a percent or two.  Foreign bonds in developed markets gained a bit with continued hopes for quantitative easing measures in coming month, which has a depressing effect on bond yields, while emerging markets were mixed with a risk-off tendency on the week.

Real estate generally experienced declines, in line with broader equities, but to a lessened degree.  Foreign REITs generally outperformed domestic names, with hopes for additional stimulus forthcoming and implied pressures from higher U.S. rates.  U.S. apartments/residential led with flattish results while retail/malls fell with associated earnings results from several key retailer names on the week.

Commodities fell backward again, with the energy sub-group falling by over -5% upon government reports of continued higher supplies—West Texas Intermediate Crude declined from the $44.50 level the prior week to just over $40 by Friday.  Precious metals were the best-performing asset class with minimal losses and a little-changed dollar not having much impact.  High oil supply levels continue to weigh on markets, as the shale riches promised several years ago have created more of a glut than anticipated; additionally, the prospect of increased exports from abroad (notably Iran) are outstanding.  To make matters worse, slowed economic growth in China has sporadically weighed on the demand side.  A question that surfaces again at this point is: ‘Where is the bottom for oil prices?’  Many experts are hesitant to provide guidance in this newer paradigm, but round numbers, such as $30 or $40 tend to be behaviorally meaningful support and resistance points in commodity markets.  Further out, however, several commodity groups are pegging longer-term ‘stable’ levels in the $45-65 range, which is lower than the $70-80 fair value assumed to be a reasonable anchor not all that long ago, and these estimates continue to evolve (mostly downward).  At the same time, these are lower oil and gas prices we’re talking about…why are we complaining?

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.