Economic Update 3-07-2016

• Economic data was mixed to better on the week, with manufacturing ISM a bit stronger, yet several measures remained in contractionary territory.  Services looked stronger, including construction, as did Friday’s employment report.
• Equity markets experienced positive results as oil pushed higher, and decent economic numbers resulted in interest rates also moving upward, punishing fixed income markets.

U.S. stocks ended the week higher, led by a rebound in energy stocks and financials, while defensive sectors healthcare and consumer staples experienced marginal gains.  Higher-beta small caps outperformed larger companies.

Foreign equities generally experienced the strongest gains, particularly with the dollar weakening, led by a recovery in commodity-sensitive emerging markets.  Additionally, some analyst upgrades in the peripheral European banking sector appeared to help sentiment, as did ECB commentary pointing to ways to help the banking system better deal with negative interest rates. Chinese shares gained, with central bank cutting reserve requirements to enhance liquidity, although Moody’s downgraded the rating of their sovereign debt.  Oddly, Brazilian stocks gained +25% on the week as hopes for political regime changed again looked increasingly likely.

U.S. government bonds lost ground, with yields rising across the yield curve by over 0.10% in some segments (doesn’t seem like a lot, but can be a percent or more of capital loss for a long bond).  However, credit—especially high yield—rose several percent along with positive sentiment in the energy segment.  In keeping with the ‘risk-on’ week, emerging market debt also fared well.  Japanese bonds sold at a negative yield for the first time last week at auction, as secondary market issues have experienced sub-zero yields already—ironically, as yields fell, the bonds performed well.

Commodities gained several percent in a variety of segments, with help from a weaker dollar, but mostly due to boost received from higher oil prices, which moved from $33 to close near-$36 levels for the first since early January.  At that low price level, a few dollars can represent big percentage points, which carried over to energy equities and peripheral holdings.  This was despite more sporadic news during the week, including reports of American Petroleum Institute and Dept. of Energy reports of large inventory build-ups in the Cushing, OK delivery port.

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.