Economic Update 12-14-2015
- Economic data for the week was led by a marginal showing in retail sales, a drop in consumer and business sentiment, as well as continued impacts of disinflationary impulses in import prices and PPI.
- Global equity markets fell dramatically on the week with continued concern over the impact of falling crude oil prices. Bonds fared well during the week, as interest rates declined.
Stocks suffered last week as further worries about oil and other commodity price declines pressured risk assets lower—equities down to lows last seen a month ago. So far, the infamous ‘Santa Claus’ rally has yet to really surface. From a sector perspective, more defensive utilities and consumer staples stocks weathered the week with smaller losses of just under -2%, while energy, financials and materials suffered the most. The master limited partnership (MLP) market has also been hit sharply by the drop in oil prices; while volumes and not nominal prices affect prospects here, large index component Kinder Morgan cutting its dividend (although for reasons beyond just low oil prices).
Foreign stocks in developed markets held up a bit better than U.S. names, especially when translated back in USD terms. Japanese markets actually gained some ground on the week, although pressure remained on exporters from a rising yen. Brazil fared well upon news of legal concerns regarding President Rousseff’s impeachment, and official Chinese CPI came in at 1.5% year-over-year, which was just a tick above expectations, heavily affected by lower commodity prices—services CPI rose just over 2%. This was taken as a positive, although somewhat offset by soap opera-like news that the chairman of China’s biggest non-state owned conglomerate (Fosun Group) had gone missing (as is presumed being detained by authorities on corruption charges).
U.S. bonds were generally strong last week in a ‘risk-off’ move away from equities. Long treasuries in the U.S., U.K. and Eurozone experienced the sharpest gains, up nearly 2%, and intermediate governments/corporates generally provided positive returns. The laggards were newsworthy high yield bonds, which lost over -2% on the week on energy sector concerns. Emerging market local debt lost even more ground, being the common victim of sell-off when risk-off weeks occur. As you can tell from the table below, short-rates have already moved higher this year with the expectation of a FOMC rate hike at some point this year.
Real estate investment trusts sold off in the U.S., although to a much more tempered degree than broader equities. Healthcare and retail held up on the high end, while cyclical lodging/resorts lagged. Asian and European REITs lost a little less ground than domestic names, with help from a weaker dollar.
Commodities were sharply lower on the week, led by continued weakness in crude oil, and despite the dollar falling by about a percent, which usually helps pricing in the broader group (it did help industrial metals somewhat). Gold also fell in a continued slide coupled with expected Fed action this coming week. The International Energy Agency predicted the supply glut to persist until at least late 2016, which had some traders on edge. West Texas crude fell from the $40 range early in the week down to just above $35 as participants finally internalized dynamics from the unusual OPEC meeting the week prior—essentially the cartel members will keep on pumping. This both harms and hurts their own self interests as higher production brings in more sales volume (a key source of revenue for many of these countries) but, of course, the higher the volume and inventory, the lower the price. The market has had a difficult time finding what this new market-clearing price is. And when markets are uncertain about a fair value, price volatility spikes. For perspective’s sake, crude fell to $33.20 in 2009 in the depths of the financial crisis aftermath, so it will be interesting to see if this level is breached, although the reasons for the drop couldn’t be more different—lack of demand then, too much supply today.
|Period ending 12/11/2015||1 Week (%)||YTD (%)|
|BarCap U.S. Aggregate||0.47||1.17|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
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.