Economic Update 5-02-2016

• As expected, the FOMC didn’t take any interest rate policy moves following their April meeting, while 1^stquarter GDP came in a bit lower than expected, manufacturing data continued to show some ongoing weakness, while housing reports were decent.

• Stocks lost ground on the week globally, not helped by the Bank of Japan’s lack of action on the accommodation front.  With interest rates falling, bonds gained, led by credit, which was helped by continued recovery strength in energy.

Stocks were lower on the week, with the bulk of sectors performing in flattish fashion with a few outliers—utilities sharply outperformed, while technology and health care lost several percent each.  Technology performed especially poorly thanks to famed investor Carl Icahn’s announcement of ‘I sold Apple,’ considering worries about consumer growth in China.  In recent weeks, nearly 80% of firms have beaten earnings estimates for the quarter while well over half have outperformed revenue projections as well, so the season has been considered much better than expected (although expectations were quite poor to begin with, which makes that assessment less meaningful).

The dollar fell by -2% on the week, which also helped the relative returns of several foreign markets relative to U.S. stocks.  Internationally, Japanese stocks were the worst-performing (down -12% in local terms, less in USD terms), as the Bank of Japan opted to not to conduct further easing measures, although investor consensus was on the side of wanting additional QE.  Inflation fell into the negative again, but labor conditions continue to improve (unemployment in Japan is just over 3%) as did industrial production and housing starts—which may have led to the decision which disappointed markets.  European losses were minimal for the week, with low volatility, as Eurozone GDP grew +0.6%, which was low as expected, but did outperform that of the U.S.  Speaking of central banks, China fixed the yuan a half-percent higher, which was largest 1-day appreciation since it was revalued.

U.S. bonds generally gained with a risk-off tendency for the week and lower interest rates across most of the yield curve.  Credit spreads also tightened, lending to outperformance from high yield debt, which has benefitted from stronger energy pricing.  Foreign bonds were mixed, with USD-based indexes gaining a few percent due to a weaker dollar and local indexes were mainly flat.

U.S. real estate was generally little changed on the week, as strength in mortgage and health care REITs was offset by a pullback in apartments/residential.  Real estate in Europe and the U.K. outperformed equities, being up several percent. Year-to-date, the best global REIT returns have been in commodity exporters Canada and Australia, which have gained +25% and +15% respectively, in line with recovery in the commodity complex.  However, real estate valuations on both the commercial and residential side in those two nations continue to be concerning for many analysts.

Commodities again moved higher, driven by oil, gold and a weaker dollar, although all major sub-groups ended up in the positive.  West Texas crude sprung higher from $43.80 to $45.90, close to another +5% gain.  For the year-to-date, energy and precious metals remain in the lead, each earning recovery returns of over +22%.  Oil prices have recovered sharply as of late; last week, a DOE report showed a decrease in domestic production, which spurred sentiment.  This is a point in the year when crude/gasoline storage buildups begin to turn into drawdowns, not to mention higher gasoline use from increased summer driving as well as refinery outages for seasonal changeover/repair.  Expectations vs. actual results in production numbers as well as any response from the Middle East could add continued week-to-week sentiment changes going forward.  Long-term price assumptions from firms who specialize in commodities appear to remain in the $50-60 range—with ‘long-term’ being the operative word.

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.