Economic Update 4-11-2016
- In a relatively quiet week for economic data, ISM services showed further improvement into expansionary territory, and some jobs data offered a decent showing, with lower claims and stronger hiring and quits activity in the governments JOLTs report.
- Equity prices generally fell globally with sentiment for economic growth declining a bit. Bonds rallied upon lower interest rates. Commodities gained, with oil leading the charge as a result of lower inventories.
U.S. stocks were down—in fact, experiencing their worst week in two months. Some early declines coincided with a Fed official noting that markets were too slow in pricing in interest rate increases; however, this affected equities more than it did fixed income. Energy and health care posted positive returns; financials and cyclicals lost the most ground with continued concerns over global growth and yields remaining low. Earnings season is now beginning, and results here may well dominate sentiment over the next few weeks. Expectations are tempered, with S&P earnings slated to be flat to single-digit negative on a year-over-year basis, while hopes for improvement later in 2016 remain intact. Again, much of the index’s earnings number will depend on how energy (and financials) snaps back, as other sectors offer a mixed bag for the quarter.
Foreign stocks as a whole lost a bit of ground as well, similar to U.S. equities. Europe overall was just slightly positive on the week. European financials specifically have been weighed down as of late by concerns in the financial sectors and a glut of bad loans (particularly with Italian banks), but a European Commission plan to help compensate savers for losses boosted sentiment. Japan lost ground in local terms as business sentiment fell and PMI dropped below the 50 neutral reading, but actually gained several percent in USD terms as the yen continued to appreciate (it’s up dramatically versus the dollar so far this year, which has tempered poor local currency stock performance). As we know with the U.S. experience, however, a strong currency is not good news for exporters, so this adds another challenge for Japanese policymakers attempting to stimulate.
Emerging market stocks lost a few percent on the week. Brazilian stocks fell off dramatically early in the week, before rebounding somewhat in a macro response to impeachment possibilities and hopes for a ‘better’ regime, although it continues to be unclear as to what a new regime would look like and how much change is possible in the near term.
U.S. bonds saw strong gains as yields fell across the curve. Due to the typical duration effect, long investment-grade bonds outperformed, but high yield and bank loans also experienced gains, even as spreads ticked slightly wider.
The U.S. dollar weakened by a half-percent to over a percent, depending on the index being measured. Normally, this would buoy foreign bonds, but key developed markets in Europe, U.K. and Japan came in with similar results to U.S. indexes. Emerging market bonds generally sold off a bit along with wider spreads and move away from risk-taking on the week.
Real estate in the U.S. fell about a half-percent, which was a decent showing compared to broader equities—as is the +5% return year-to-date. European and Asian REITs gained several percent, leading the global group.
Commodities performed positively, largely the result of oil prices moving from $36.60 to $39.70 by week’s end—causing the energy group to gain +7% on the week as a whole. The gain was supported by American Petroleum Institute and U.S. Department of Energy inventory numbers mid-week which showed less supply than feared, as well as rig counts that show a continued reduction in drilling activity. At the same time, traders appear skeptical as to whether not production cuts are still in the works for OPEC nations. Precious metals also gained, with yields falling, while industrial metals declined several percent due to global growth concerns.
|Period ending 4/8/2016||1 Week (%)||YTD (%)|
|BarCap U.S. Aggregate||0.48||3.52|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
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.