Economic Update 4-25-2016

• Economic data for the week was focused on several housing stats, including higher home prices, existing home sales but lower starts and building permits.  Jobless claims fell to multi-decade lows, which was good news for the labor market.

• Stocks rose on the week with decent earnings reports and higher energy prices. Bonds lagged due to higher interest rates.

U.S. stocks generally gained on the week with stronger-than-expected earnings numbers and a boost in commodity prices.  With a fifth of the S&P reporting during the week, over 80% of earnings numbers came in above expectations, including several blue chip industrial and consumer firms.  Cyclical sectors financials and energy, along with health care, led by rising several percent on the week, while defensive utilities and consumers staples lost a few percent.

Foreign stocks outperformed U.S. names, despite a slightly stronger dollar on the week.  The ECB met and left key interest rates and pace of QE asset purchases unchanged, although Draghi’s comments were tinged with a negative tone—implying risks were on the downside and deflation could re-emerge in the near-term—although the program overall appeared to be working.  The largest gains were seen in the European periphery, with Draghi’s pessimistic language from Draghi leading investors to assume more stimulus there, while commodity-sensitive nations, such as Russia, Canada, Norway and a few other emerging market names, gained with stronger pricing in oil and the commodities group as a whole as of late.  Only a fraction of European stocks have reported earnings so far, and, like in the U.S., results have been better than expectations (although expectations have been repeated slashed throughout the quarter).  Japan fared well, despite a major earthquake raising concerns over manufacturing disruptions there, and was buffered by the positive impact of a weaker yen.  Brazil and China underperformed the group, with losses in the single-digits, due to continued political uncertainty in the former and a spike in corporate debt defaults in the latter.

U.S. bonds lost ground as a ‘risk-on’ environment also pushed up interest rates. However, corporates fared better than governments, with high yield performing decently as credit spreads contracted—partially helped by higher oil prices.  In foreign bond markets, developed market debt in Europe sold off somewhat in response to non-action by the ECB.  Interestingly, Argentina held an offering of $16.5 bil. in new debt (rated B-, with yields ranging from 6.25% to 8.00%).  This was its first entry back into world bond markets in 15 years (and following contentious and long-lasting litigation after the nation’s 2001 default), which was oversubscribed by four times—demonstrating strong investor demand.  Perhaps this is another demonstration of global investors’ frantic search for yield wherever it can be found.

Commodities rose on the week, on the back of crude oil, which gained roughly $2/barrel to end at just under $44—its highest level since last November.  This is despite last weekend’s OPEC meeting in Doha which did not result in the production cuts some had expected; however, rig counts continue to show decreased production on the domestic side and hope for some type of production agreement in an upcoming meeting in Russia was encouraging.  The industrial metals and agricultural groups rose to a somewhat lesser degree, while precious metals ended flat.  Year-to-date, energy and precious metals are now nearly tied for leadership with each segment up over +15% since year-end.  Unsurprisingly, investor sentiment towards the asset class has improved dramatically over the last few months compared to abundant pessimism at year-end.

In other bond news, the Saudis announced that they could liquidate as much as $750bil. of their U.S. Treasury bond holdings and other U.S. assets if Congress moves forward with a proposed bill revoking sovereign immunity and allowing victims of 9/11 to sue the Saudi government for any found involvement.  While this worst-case scenario is viewed as less likely, this remains the type of market risk that isn’t captured through inflation or earnings data.  Naturally, a sell-off on treasuries would depress prices and push interest rates higher.

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.