Economic Update 2-16-2016

• Economic data last week was decent, highlighted by better-than-expected retail sales and lower jobless claims, while consumer sentiment fell somewhat.

• Stock markets experienced another down week, as concerns over global growth and oil prices continued to dominate sentiment; U.S. equities outperformed foreign.  Bonds fared well as investors fled away from risk assets, which also helped precious metals continue their strong run this year.

U.S. stocks were largely down on the week with continued energy volatility and global growth concerns, not to mention uncertainty about Fed interest rate policy (Janet Yellen’s side comment before Congress noting that negative rates are always an option in the toolkit).  From a sector standpoint, more defensive consumer staples led the way, gaining a percent on the week, while financials, utilities and materials all lost generally over -2%.  Small caps remain pressured, being in -20% bear market territory at this point.  With three-quarters of S&P companies now having reported Q4 results, the outcome has been revenues in line with expectations and earnings ahead of expectations by almost +5%.  Of course, including energy, EPS growth for the entire index ended up negative, while ex-energy, results translated to a +4% gain.

Overseas, emerging markets, particularly in the Asia-Pacific region fared best with minimal losses, although Chinese local A-share markets were closed for the weeklong Chinese New Year. While most markets fell within a generally tight band, Japanese equities underperformed the group dramatically, falling -10% in both local and USD terms (worst week there since the ’08 financial crisis) and falling into bear market territory upon bond yields breaching negative territory temporarily and a stronger yen.  European bank stocks have been similarly pressured as of late, with the specter of negative rates weighing on earnings and continued sluggish growth perhaps putting strains on loan portfolios.

In the U.S., government bonds fared well as interest rates fell across the longer-end of the yield curve, benefitting bonds at the 10-year area and longer.  However, credit spreads widened, resulting in corporate debt losing ground on the week.  High yield indexes were at the low end of the spectrum for the week, losing nearly -2% on continued energy price volatility. Internationally, the dollar fell again by -1%, which benefited dollar-denominated indexes over local.  Generally, this effect aside, global safe haven issuers, such as Germany, Japan and the U.K., fared best on the week while the results of emerging market issuers were mixed.

Real estate indexes in the U.S. fell over -4% for the most part, generally underperforming broader equities.  Economically-sensitive lodging/resorts actually fared best on the week, bucking recent trends, followed by retail/malls, timber and healthcare suffered the most with larger losses.  Global returns differed by region, but all performed in a similar pattern to the U.S. for the week.

Commodities, fell dramatically early in the week, led by crude oil which moved from $31 to just above $27, before rebounding Friday to near $29.50 for the biggest one-day gain in 7 years. Despite the deceivingly small apparent dollar moves around this level, on a percentage basis these can approach +/- 10% a day.  The late week gains were apparently due to more OPEC rumors; this time about a potential production cut to stabilize/boost prices.  One of 2016’s winners, gold, also experienced sharp gains of +7% for the week as market volatility sent investors again toward safe haven assets and low treasury real yields were apparently a less compelling option.

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.