Economic Update 5-23-2016

• Economic data on the manufacturing side was lackluster, with indexes contracting again.  Inflation was again generally contained, and housing came in a bit better than expected, while the FOMC minutes from April surprised somewhat—being more biased towards tightening than some observers first thought.

• Equity markets in the U.S. and developed foreign markets moved slightly higher on the week generally as investors absorbed the more hawkish set of Fed minutes, while emerging markets lost ground.  Bonds declined as interest rates ticked up along the yield curve.  Commodities gained with a continued recovery in oil prices.

U.S. stocks inched upward a fraction of a percent on the week, despite several weaker days caused by a more hawkish sentiment towards raising interest rates implied by the Fed’s April meeting minutes released during the week.  By industry, energy, tech and financials gained the most ground, while defensive utilities and consumer staples lagged several percent each.  The tech sector was boosted by a vote of confidence from Warren Buffett, where it was reported Berkshire Hathaway made a billion dollar investment into Apple.

The dollar strengthened by almost a percent on the week, acting as a headwind for foreign assets of all types.  Non-U.S. equities generally gained in local turns, but still managed to outperform in USD terms by a bit.  Returns were led by Japan and the U.K., while European stocks were generally in line with the U.S.  Japanese GDP for the 1^st quarter came in at +0.4%, resulting in a +1.7% year-over-year gain—which was far better than expected.  Emerging markets lagged on the week, with Brazil and Russia posting declines, while Chinese stocks fared better.  Brazilian stocks have been the star of 2016 insofar as emerging markets go, but momentum has tapered off in recent weeks as hopes for more dramatic political change have stalled somewhat, despite the impeachment of President Rousseff.  A lack of Brazilian exposure has hurt some active emerging market managers this year, particularly those who focus on what they consider to be higher-quality firms (which can be more difficult to find in commodity-sensitive and politically-uncertain nations like Brazil).

U.S. government bonds sold off by 10-15 basis points across the yield curve, again due to the perceived higher (albeit still small) likelihood of Fed action over the summer.  The hardest hit were longer duration treasuries, as usual, while shorter- and intermediate-term debt were less affected.  High yield bonds gained some ground as spreads tightened over the week, as did bank loans to a lesser degree.  In recent weeks, demand has been high for U.S. treasuries from abroad, due to uncertainty in foreign political prospects (like the potential ‘Brexit’) as well as negative interest rate conditions, which make any positive yield appear extremely attractive by comparison.

Foreign bonds lost ground, which fell in line with the rising dollar—with emerging markets faring a bit worse than developed markets.  Greece is back in the news as the IMF has been pushing the Eurozone to allow Greece to skip interest and principal payments for the next 25 years on its owed €200 bil. debt, then build in a refinance at a 1.5% interest rate for several decades after that.  The Europeans are naturally reluctant, but also seek IMF participation in the bailout effort to boost legitimacy.

Real estate lagged along with higher interest rates, with the U.S. segment losing a few percent.  Asian REITs were off slightly, while European REITs gained for the week.  Year-to-date, returns between domestic and foreign real estate have fallen roughly in line.

Commodities experienced another positive week, led by higher energy prices, although at a more tempered pace—West Texas Intermediate Crude rose from a few cents above $47 to just under $48.50.  Outside of energy, the bulk of other commodity groups sold off with no help from a rising dollar and higher rates, which punished precious metals.

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.