Economic Update 3-21-2016

• Economic news was led by the Fed’s decision to hold back on any rate changes, while sounding a bit more dovish than in recent meetings. Manufacturing activity has bounced back somewhat, seen through better survey results.  Inflation remains muted, although signs of some increases are apparent at the core level, while housing results were mixed.

• Equity markets gained on the week with interest rate pressures lessened and an improvement in manufacturing data, which had been weak as of late. Bonds also performed well upon the move lower in interest rates.  Oil continued to recover with a decent gain on the week, pushing commodity indexes higher.

U.S. stocks gained for the week, with returns led by rebounds in industrials, materials and energy, which followed along with stronger commodity prices. Health care was the weakest sector for the week, led by the pharma group losing a few percent.  The S&P is now up +12% or so from lows in mid-February, back to nearly flat for the year-to-date period.

European equities performed positively but trailed the outcome of U.S. stocks, as sentiment about growth was less favorable.  The impact of a falling (again) dollar no doubt was helped by the Fed’s dovish interest rate talk.  The Bank of Japan met and didn’t increase stimulus, keeping key rates at -0.1%, which disappointed markets a bit.  This and poor export numbers, particularly from Asian trading partners, left Japan in the negative for the week.  The winners again were the emerging markets, which benefitted from additional commodity stabilization, higher oil prices and a political showdown in Brazil. It seems several negative influences here have perhaps flattened out somewhat—we dare not say bottomed, due to the several false bottoms experienced in the past—but sentiment has been so poor in this area, an eventual change was inevitable.  Change always is.

U.S. bond yields fell in response to the Fed’s dovish sentiment, and apparent slowing of potential interest rate hikes this year.  This downward push on rates was a positive for bond returns, as long duration debt outperformed, while corporate bonds—including high yield—ended up performing positively.  A falling dollar on the week aided the performance for foreign debt, adding over a percent to returns, while several long bond rates fell deeper into the negative—including Japan’s 10-year, which reached an all-time low of -0.135%.  Year-to-date, long treasuries in the U.S. and developed market sovereign debt have led bond returns with gains in the upper single-digits as yields have fallen sharply worldwide.  Interestingly, emerging market bonds have also shown decent gains as well, which could likely be due to the positive carryover effects of expected slower rate hikes by the Fed.

Real estate performed well again, solidly positive and outperforming many other equity groups.  Industrial/office and residential/apartments led all sectors in the U.S., although developed Europe outperformed globally, as sentiment from ECB easing has carried through.

Commodities continued to bounce back a bit with oil moving again higher, from $38.50 to just over $41.00, an increase of +6.5%, as news of reduced Saudi production filtered through markets.  Non-energy commodity groups were less dramatic, with agriculture gaining slightly, while precious and industrial metals lost a bit of ground.

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.