Economic Update 5-16-2016

• In a slow week for economic data, retail sales gained more than expected, while consumer sentiment also came in showing strength.  Jobless claims were the sole weak spot, but this may have been the result of one-off seasonal adjustments.

• Stock markets fell across the globe along with poor retail earnings, while bonds gained with interest rates ticking downward.  Due to a variety of cross-currents, crude oil prices rose again, into the upper $40’s/barrel.

U.S. stocks lost ground on the week on net, as weak earnings for a variety of large-cap retail stocks led sentiment downward.  Defensive utilities were the leading sector on the week, as consumer cyclicals, industrials and financials suffered the most.

Foreign stocks in Europe and Japan gained ground in local terms, but a stronger dollar converted the week into a loss for both.  Italian banks were another negative catalyst in the former, as they have been all year as another round of write-downs occurred.  On the opposite side, Greece gained sharply (and up nearly +30% over the past month) as there appears to be political willingness to keep the fiscal austerity in place as the next upcoming bond payment to the ECB is looming in July—and preventing a re-escalation of tensions seen in several prior occasions.

Emerging markets suffered the worst declines, led by losses in China in the -3% range.  Over the prior weekend, China’s trade data showed stagnant export growth (down -2% year-over-year) and tempered growth in imports (-11% year-over-year), so both were a disappointment.  Imports weren’t quite as bad from a volume standpoint, but lower pricing affects nominal calculated values).

U.S. bonds pushed upward with minor gains as poor risk asset returns pushed down interest rates.  Government bonds and credit performed roughly in line.  Foreign bonds were challenged by a stronger dollar on the week, largely ending up in the negative.  Interestingly, Spain issued the first 50-year bond in several years, raising €3 bil. at a yield of 3.5% (although investor demand was over 3 times that amount).  France and Belgium both issued bonds of similar maturities last month, while Belgium and Ireland issued 100-year debt at rates around the 2.3% range.  In keeping with our discussion about government bond yields and duration during last week’s monthly advisor meeting, 50-year and 100-year bonds at those yields offer durations of 23 and 40 years, respectively.  Talk about interest rate risk.

Commodities rose again, with the energy sub-sector leading the way, up +5% for the week.  West Texas crude rose from $44.60 to $46.90 as a flurry of news including Canadian wildfires and pipeline bombings in Nigeria, which, combined, knocked 1.5 mil. barrels/day offline.  These events are in addition to an International Energy Administration report showing higher oil demand from emerging markets and a narrowing of the current oil surplus.  Agriculture also rose on the week by a few percent and industrial metals declined by roughly the same amount, with copper and nickel both down significantly.

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.