Economic Update 2-1-2016

• In a packed week for economic news, the FOMC kept the interest rate level unchanged, while the Japanese decided to lower rates to negative territory.  The flurry of other data was generally variable, with economic growth, manufacturing, housing and sentiment measures coming in showing mixed and occasionally contradictory results.
• Global equity markets ended the week on the positive side following the Japan easing news on Friday.  Bonds also ended positively, with long-term interest rates falling back below 2%. Commodities gained as oil prices recovered somewhat on the week.

Stocks started the week in the red again, with a negative response after the Fed statement, mixed manufacturing and earnings results, as well as continued concerns about oil and China as has been the case for several recent weeks.  However, hopes were rescued Friday with a big announcement from the Bank of Japan that interest rate policy levels would be lowered into negative territory until inflation moves closer toward their 2% target.  Being one of the largest global economies, this raised hopes that stimulus would again be a tailwind for the global economy and equity earnings.  What this means in practicality is that the BOJ will charge a fee (instead of pay interest) to commercial banks for holding capital reserves.  The idea, like the case with several European nations who’ve employed the same technique, is pushing more money out into the economy to stimulate growth and discouraging the hoarding of cash.

In U.S. markets, telecom and energy fared best, with gains over 4%, while health care ended up as the sole sector in the red, losing -2% on the week.  Overseas, emerging markets and, specifically, commodity producers—including Brazil, Russia and South Africa—fared best with gains in the higher single digits.  Offshore Chinese stocks gained while local returns were hit with additional losses, as negative sentiment among retail investors there continues to be very pervasive (local A shares are down -25% year-to-date).

U.S. bonds held up well, as the 10-year treasury yield fell back under 2% and the lowest level since last April.  No doubt the weaker growth environment and dovish Fed statement led to hopes that the pace of rate increases could be slowed down to below what was originally expected for this year.  Long-term U.S. treasuries and other longer-duration debt globally fared best with gains over a percent.  Emerging market and high yield corporate bonds also fared well, with risk being in favor and oil prices recovering somewhat.  The Yen weakened upon the news, which is no surprise, due to unfavorable interest rate carry and additional stimulus burden.

Domestic real estate generally gained on the week, albeit to a lesser extent than broader equities.  Asian REITs fared much better, particularly in Japan, with the additional stimulus measures offered last week by the BOJ, which should act as a boost to all risk assets.

Commodities rose on the week, as oil moved from the $30 to the near-$34 range upon news of discussions between Russia and OPEC concerning production levels—presumably geared at stabilizing prices.  Other commodities also gained a few percent, including industrial and precious metals.

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.