Weekly Economic Update

Economic Update 4-04-2016

  • Economic data for the week was highlighted by a turnaround in manufacturing, decent housing reports and a generally positive but uneventful employment situation report.
  • Equity markets gained on the week with decent economic data, while bonds also performed well along with a drop in interest rates.  Commodities fell on the week as oil supply concerns again rose to the forefront.

U.S. stocks experienced some positivity on the week with the biggest gains coming from consumer staples and technology, up nearly +2.5%, while energy fell over a percent coinciding with cheaper oil prices.  It certainly may not feel like it, but the S&P reached a high for 2016 so far, and is just a few percent below it’s all-time peak last May.  For the week, small-caps outperformed large-caps dramatically, as investors re-embraced risk—perhaps helped by better domestic manufacturing numbers, a decent jobs report and dovish Fed sentiment.

Overseas, developed markets in Europe and the U.K. lagged U.S. equities slightly, with a weaker dollar/stronger euro.  Japan performed exceptionally poorly—losing several percent—as retail sales reports came in much weaker than expected, as did inflation.  Emerging markets again showed strength, led by Brazil, which appeared ever closer to the regime change that has excited markets all year.  China’s PMI also rose into expansionary territory to its highest level in a year and a half, which improved general EM sentiment.

With dovish Fed talk, interest rates declined across the yield curve, resulting in a positive week for domestic bonds.  Results were little differentiated across segments, but longer-duration investment grade debt outperformed high yield and bank loans by a few dozen basis points.

Foreign bonds in developed markets continued to plod along making gains, as interest rates abroad declined—partially in response to a deflationary report in Europe for the past month and weak year-over-year inflation figures.  A weaker dollar by a percent and a half also helped as a tailwind to foreign returns.  European debt generally outperformed Japanese for the week.  It’s important to be reminded of the difficult headwind that negative yields create over time—instead of earning a small, consistent coupon over time that provides an amount of positive return, this situation creates the opposite scenario and gives up small amounts of return over time, all else equal. Emerging market bonds were among the strongest performers of any asset on the week, led by the same factors that boosted EM equities.

Real estate continued its strong run in 2016, as lower interest rates and dovish Fed communications have pushed away potential shorter-term rate fears, which can add to REIT volatility.  To a lesser degree, European real estate also gained, while Japan declined, in tune with their broader equity markets.

Commodity indexes fell several percent on the week, led by a decline in the energy group of over -5%.  While natural gas bounced back somewhat, crude oil prices moved down from just under $40 to sub-$37 by Friday.  Despite smaller-than-expected inventory builds in the U.S., in another chapter of the oil drama, the Saudis cast doubt on their willingness to cap production unless broader cross-nation agreement could be met; therefore, a lack of cap keeps supply at a high level.  Other commodity groups, such as industrial metals and agriculture, have offered a mixed bag so far in 2016, which is certainly an improvement on the ‘falling knife’ performance of the past several years. Areas of positive performance include soybeans in the ag group, due to planting expectations, and copper and zinc, where it appears some Chinese supply excesses in metals may be finally declining somewhat.

Period ending 4/1/2016 1 Week (%) YTD (%)
DJIA 1.58 2.82
S&P 500 1.84 1.99
Russell 2000 3.63 -1.19
MSCI-EAFE -0.21 -5.08
MSCI-EM 1.71 4.04
BarCap U.S. Aggregate 0.58 2.99
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
3/24/2016 0.30 0.89 1.39 1.91 2.67
4/1/2016 0.23 0.76 1.24 1.79 2.62

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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