Economic Update 5-09-2016

• Economic data for the week was highlighted by continued mixed results in manufacturing, but stronger non-manufacturing/services data.  The employment situation report for April was a bit of a disappointment, mostly due to the doubt it casts on Fed action in the near future.

• Equity markets declined on the week, but domestic high-quality bonds performed positively as interest rates declined.  On the other hand, U.S. high yield and emerging market bonds weakened in line with lower oil prices.

U.S. stocks generally lost ground on the week, led by mixed economic and earnings releases.  From a sector standpoint, energy and materials were the hardest hit, in conjunction with commodity prices, while defensive consumer staples and utilities earned positive returns for the week.  With earnings season wrapping up, and close to 90% of the S&P having reported, the headline number continues to look weak with -6% year-over-year earnings growth.  However, removing energy from the equation raises the figure to just under +4%; so a similar story to what we’ve seen over the past year.

It may appear that we’ve seen less volatility over the last several weeks, and, in fact, we have.  From March 1 through Friday, the average daily absolute change has been just under +/- 0.50% per day, which is a shade under the long-term average of +/- 0.66% experienced since 1950.  During January and February, the average daily absolute change spiked at +/- 1.09%, so it didn’t just seem more volatile—it significantly was.

Abroad, Japanese shares led with positive results, while most other regions performed negatively in line with U.S. stocks as well as the headwind of a stronger dollar.  Emerging markets suffered the most, down nearly -5%, on commodity weakness—mainly among the larger BRIC exporters such as Brazil, Russia and Mexico—although negative returns were widespread globally.  Turkey’s prime minister abruptly resigned in a disagreement with the long-standing president, corresponding with a severe market decline.

U.S. investment-grade bonds gained some ground on the week, with general risk-off sentiment for equities and lower interest rates.  No doubt, the poor employment report on Friday caused analysts and traders to reevaluate the likelihood of Fed action in coming months, which could perpetuate an assumed ‘low for longer’ rate environment.  (Interestingly, fed funds futures now indicate a <5% chance of a hike next month and just under 50% for December.)  Conversely, high yield debt lagged with lower oil prices.  Developed market foreign bonds also lost some ground, with local currency emerging market bonds down several percent in keeping with dollar strength.

U.S. real estate bucked the trend of other equity groups, coming in with a +5% gain for the week, led by retail.  Foreign REITs lagged with negative returns, in similar fashion to other foreign equities.

Commodities declined several percent, led by a stronger dollar—weakness was experienced in most all sub-groups.  Industrial metals lost the most ground, but oil news continued to drive sentiment, with prices declining from $46.00 the prior week to $44.65 by Friday.  Iran discussed the possibility of participating in a production quota under certain conditions, while Saudi Arabia raised prices for certain crude sales to Asia—which boosted sentiment of traders.

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.