Weekly Economic Update

Economic Update 2-8-2016

  • Economic data was highlighted by better-than-expected results in manufacturing and weakness in services—both the opposite of recent trends.  The Friday employment situation report was mixed, leaving investors wondering about possible effects on upcoming central bank policy.
  • Global equity markets fell on the week, with uncertainties about economic growth and volatile oil prices.  Fixed income gained on the risk-off week, with lower interest rates.  Foreign assets were affective positively, at least for U.S. investors, from the largest one-week decline in the dollar in several years.

After a promising end to the previous week, stock prices declined again along with oil prices and a mixed employment report on Friday.  Materials and utilities actually gained sharply, among sectors in the S&P, while consumer discretionary and information technology lost over -5%, demonstrating a wide band of market sentiment on the week.  Small-cap stocks continued to suffer far worse than large caps, causing portfolio underweights here to continue to be effective in allocations.

The dollar experienced its worst week since 2009, falling almost -3%, as lackluster economic data hurt sentiment and lowered chances of near-term Fed rate hikes.  As it stands, March had had been taken as a given, but probability of a move next month has now fallen dramatically.

This weakness naturally helped foreign stocks, which were led by emerging market names such as Indonesia, Brazil and China, while larger developed markets in local currency terms lagged dramatically, due to the weaker dollar, as well as from lackluster European earnings results and economic forecasts.  Uncertainty also persists regarding the U.K.’s membership in the EU, and negotiations persist, led by the EU’s desire to retain the nation under the broader union.

U.S. bonds experienced gains with movements away from risk assets, with lowered interest rates across the yield curve.  As expected, longer duration debt, such as 10-20 year treasuries, experienced the strongest gains while investment-grade credit and other areas were generally flat, as wider credit spreads offset some of the duration movements.  High yield indexes lost ground by over a percent.  This is a bit of an overlooked issue, but there has been a sizable divergence (a few percentage points is big in fixed income terms) in active high yield management—as those with a higher-quality and/or more credit research-intensive bent have sharply outperformed broader indexes during this most recent energy- and materials-related credit cycle.  This is one case where exchange-traded funds may offer cheap ‘beta’ exposures to certain asset classes, but you can pay a price elsewhere.

Real estate results were dependent on the sector and regional composition.  With a weak dollar, foreign REITs led the way with sharp gains, notably in Japan, Europe and Canada, while U.S. real estate came in mixed.  Healthcare came in with positive returns on the U.S. side, while recent winner apartments/residential trailed with losses.  Year-to-date, real estate returns have been in the negative, but to a lesser degree than broader global equities.

Commodities continued to be a key area of focus, with the energy segment falling by -5%.  Crude oil thrashed around the $30 area, ending at $31, a few dollars lower than last week. Continued rumors regarding production cutback deals between Russia and non-gulf nations dominated news, but the outcome was inconclusive.  One of the larger asset ‘winners’ in 2016 so far has been gold, which gained nearly +4% last week and is up +9% year-to-date, with silver not far behind.  The victim of very poor sentiment over the last several years, precious metals have benefitted from flows away from risk assets this year, coupled with low ‘risk-free’ interest rates from treasuries and lowered probabilities of Fed action in the near term, as well as fears of ultimate central bank impact on currency values in key developed markets.  Without a cash flow to measure, gold, like other commodities, is difficult to place a ‘fair value’ on, and opinions continue to span the gamut between extreme bull and bear.

Period ending 2/5/2016 1 Week (%) YTD (%)
DJIA -1.54 -6.85
S&P 500 -3.04 -7.85
Russell 2000 -4.78 -13.15
MSCI-EAFE -1.52 -8.64
MSCI-EM -0.37 -6.87
BarCap U.S. Aggregate 0.24 1.62
U.S. Treasury Yields 3 Mo. 2 Yr. 5 Yr. 10 Yr. 30 Yr.
12/31/2015 0.16 1.06 1.76 2.27 3.01
1/29/2016 0.33 0.76 1.33 1.94 2.75
2/5/2016 0.30 0.74 1.25 1.86 2.68

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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