Economic Update 1-25-2016

• Last week’s economic data was mixed, with manufacturing not as bad as expected, continued low inflation driven by commodity price declines over the past year, and mixed housing results to end the year.

• A terrible start to the week in equity markets was turned around a bit by Friday, resulting in global stocks ending up positively for the week.  Bonds provided slightly negative returns as interest rates ticked back upward.  After an early drop below $30/barrel, oil prices moved sharply higher over that level toward week’s end.

Stocks began the week sharply lower after the MLK day holiday, due to concerns about the Far East, continued weakness in oil prices and a few higher-profile earnings misses.  Chinese GDP came in for Q4 at 6.8%, which was a bit below expectations and under the 7% level of growth from recent years.  Interestingly, services grew at a faster rate of 8+%, and now takes up over half of the economy, versus manufacturing, which is moving at a slower pace and shrinking in terms of overall proportion.

Later in the week, equities rebounded thanks to European Central Bank president Mario Draghi’s public comments about the possibility of more stimulus measures in the region (despite no action last week on the rate front in Europe).  Chinese markets also rebounded as the weaker GDP report raised the likelihood of further stimulus from Beijing.  Unsurprisingly, with oil rebounding, commodity-sensitive nations such as Russia, Canada and Norway led with returns near or over +5% on the week, while Japan and troubled Brazil lagged.

U.S. bonds fell in price slightly as interest rates ticked back upward across the yield curve.  Shorter-duration bonds were the better performers, while longer maturities lost ground.  High yield bonds in the U.S. recovered somewhat along with stronger oil prices.  Foreign bonds were generally affected by a rise in the value of the dollar by about two-thirds of a percent on the week, causing local returns for a variety of sovereigns (especially in emerging markets) to show decent gains, while USD-denominated safe haven countries lagged.

REITs were among the better-performing segments, as strong underlying demand fundamentals continue to underpin returns.  U.S. real estate returns outpaced the broader equity markets on the week; commodity-sensitive Canada and Australia led the global group with strongly positive returns, while Japan lagged with negative results.

Commodities were the best-performing asset class for the short week, experiencing positive returns as oil prices recovered during the last two trading days, resulting in a net +6% gain, although other sub-sectors such as metals and agriculture gained as well.  Energy has continued to experience a high degree of volatility, as the U.S. Dept. of Energy reported an increase in inventory last week that far exceeded expectations.  Oil prices have been embattled around the $30 mark, above or below by a dollar or two, with high day-to-day moves as traders search for that magical clearing price.  With prices falling this far and a lot of bad news ‘baked in’, so to speak, a few strategists are of the mindset that we might be much closer than we think to some bottoming.

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.