Weekly Economic Update

Economic Update 1-4-2016

  • Economic numbers for the last week of the year was mixed, with more poor manufacturing data (which has been in a back-and-forth trend all year), housing prices moving higher while pending home sales fell.  Improvement in consumer confidence was a rare bright spot.
  • Equity markets ended on a lackluster note, both for the week and the full year, with falling energy prices playing a key role in the poor results.  Bonds were flat with little changes in interest rates on the week, and on net for the year as well, despite some volatility in between.  Commodities lost ground generally with oil prices falling on the week, capping off a year of substantial price declines for a variety of energy contracts.

In a generally light final week for trading activity, U.S. stock markets ended the year on a down note, as weaker energy and materials returns overwhelmed less negative returns from utilities, consumer cyclical and health care stocks.  For the full year, consumer stocks and health care served up healthy, near-average (5-10%) gains, while energy stocks lost over -20%, following the downward path of crude prices.  Large-caps again outperformed small-caps for the week, as has been the case throughout 2015.

A market we don’t mention much, due to its concentration and niche sector focus, the NASDAQ index, performed significantly better, gaining nearly +6% last year, as a small group of new economy stocks (including Facebook, Amazon, Netflix and Google—known as the FANG group) led with very strong double-digit returns, as well as by strength in biotech, which also gained over +10% for the year.  This is an example of the equity market becoming more bifurcated in its results from sector to sector, which wouldn’t be surprising to see continue in 2016.

Foreign stocks experienced mixed results, with developed markets including Japan, posting small gains (turned to losses after the impact of a stronger U.S. dollar), while emerging market results were generally weighed down by the commodity-export members, including Russia and South Africa.

U.S. interest rates were little changed on the week, resulting in a flattish week for domestic fixed income.  High yield corporates experienced the biggest gains, up nearly a half-percent, trimming year-to-date losses, while floating rate bank loans also gained.  A U.S. dollar gaining on the week served as a headwind for foreign bonds, which generally lost ground.

Real estate experienced a positive week with contributions from health care and apartments, while mortgage REITs and lodging lagged with losses.  With gains in the near-5% range, real estate was one of the best-performing asset classes of 2015.  This was due to continued strength in fundamentals, such as tenant demand and rental rates in several key urban areas, as well as a lack of oversupply that can cause real estate cycles to sputter.

A few weeks ago, we mentioned the rule changes that expanded the ability for foreign entities to expand ownership of domestic real estate assets (specifically, a larger percentage without incurring special excise taxes).  While it didn’t receive much headline attention at the time, several REIT managers we correspond with felt this was a significant market development—notably due to the possible expansion of capital coming into the market from overseas.  So, an asset class that features attractive valuations could receive additional support from this type of influence alone.

Commodities were mixed during the last week of the year.  Industrial metals and the agricultural group were flat to a bit higher, while energy and precious metals lost over a percent.  West Texas crude, the most closely watched contract in the past year, after making some headway last week, lost ground to end the year just above $37/barrel.  This compares to a price in the low $50’s at the beginning of the year—an area which continues to be the midpoint of many analyst forecasts for the next several years, despite the time frame for getting back there having lengthened a bit.

There are several sub-stories that have originated from the sharp declines in the oil patch, from credit concerns in several sectors of the U.S. high yield bond market, to earnings of energy equities (which have taken down headline earnings numbers for the entire S&P 500 for the year), as well as creating budget strains in several oil-exporting nations such as Russia and Saudi Arabia, which could have political ramifications if these conditions persist.  As it stands, the power of OPEC as a price-setter through production quotas has been challenged with the emergence of the United States as oil swing producer.  This is not to mention the natural gas markets, which have also shown high supply conditions and, if the last few weeks are any indication, a more tempered winter than seen over the past several years—although it’s still early yet.  No doubt more to come regarding oil as a key market variable in 2016.

 

Period ending 12/31/2015 1 Week (%) YTD (%)
DJIA -0.72 0.21
S&P 500 -0.80 1.38
Russell 2000 -1.57 -4.41
MSCI-EAFE -0.27 -0.81
MSCI-EM -1.23 -16.96
BarCap U.S. Aggregate -0.03 0.55

 

U.S. Treasury Yields 3 Mo. 2 Yr. 5 Yr. 10 Yr. 30 Yr.
12/31/2014 0.04 0.67 1.65 2.17 2.75
12/24/2015 0.20 1.03 1.73 2.25 2.96
12/31/2015 0.16 1.06 1.76 2.27 3.01

 

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. 

 

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