Economic Update 12-28-2015

• For a short Holiday week, quite a few economic data points were released, including flattish durable goods orders, mixed housing results but improved consumer sentiment.
• Equity markets rallied during the week, with help from some improvement in energy prices.  Domestic bonds were down on interest rates ticking upward a bit, while commodity prices benefitted from oil inventory news and weakness in the dollar.

The ‘Santa Claus’ rally did finally arrive, with a solid week in equities upon generally low volume.  From a sector view, energy and materials led with some firming in commodity prices, while consumer discretionary trailed the pack with much smaller gains.

Foreign stocks also gained, to a lesser extent than U.S. equities, with stronger returns in USD terms with a generally weaker dollar on the week (mostly due to a stronger euro).  Commodity-sensitive nations made the most headway in both developed and emerging markets, while Japanese and Brazilian equities lagged with negative returns.  Japanese performance was related to mixed government projections for growth and inflation, while the replacement of Brazil’s finance chief added to a flurry of uncertainty for that region, as did a weak quarterly government economic report.  Spanish returns recovered somewhat after early weakness following an inconclusive election in which the prime minister was reelected but conservative party lost ground in Parliament.

U.S. bonds were generally weaker, with interest rates moving higher in the belly of the yield curve by about 10 b.p.  High yield bonds were among the week’s winners, unsurprisingly, due to the rebound in the energy/materials segment which has driven sentiment in the group all year.  Foreign bonds lost ground overall in local terms but gained when translated back to USD as the dollar weakened during the short week, with Australia and Japan leading, and Europe lagging.

Real estate gained in line with equities, led by more cyclically-sensitive areas such as lodging/resorts, as would be expected in such a week, although other domestic areas such as retail and residential also gained ground.  European and Asian REITs ended up with positive returns, but to a much lesser extent.

Commodities again were in the news as a government report showed higher drawdowns of crude oil and deeper declines in rig counts than expected, driving prices several percent higher and bucking a weak trend.  Crude oil gained a solid +5% on the news, moving back from near-$35 levels representing 11-year lows to just above $38.  Natural gas prices also spiked over +10% with expectations of a return to colder conditions on the East Coast sooner than later.  Other commodity groups generally gained a few percent on average, in keeping with energy price sentiment and a weaker U.S. dollar.

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.