Economic Update 5-31-2016
- Economic data for the week was dominated by strong U.S. housing numbers, while durable goods and sentiment lagged. Comments from FOMC members alluded to a stronger chance of an interest rate hike in coming months.
- Equity markets around the world gained on the week, with continued strength in oil prices and an improvement in economic and geopolitical sentiment somewhat. With interest rates flattish, bond prices didn’t experience much movement during the week.
Stocks experienced a positive week across the board—the best week for the S&P in three months—with oil prices rising higher, better economic news from housing and some Brexit fears abating. Additionally, the Philadelphia Fed president added more optimistic rhetoric about multiple rate hikes occurring this year, coupled with Janet Yellen’s speech on Friday. On a sector basis, every group was in the positive, led by technology and financials (the latter due to hopes that a rate hike would bring a stronger operating environment), while utilities and energy experienced the lightest gains.
Interestingly, individual investors, as measured by the AAII survey, are the most pessimistic they’ve been in some time. Only 18% of respondents considered themselves ‘bullish’, which is the lowest level in 11 years (since 1987, just under 40% of respondents are in this category on the average given week). However, more are in the ‘neutral’ camp (over 50%, which is 20 percentage points higher than normal) than are ‘bearish’ (about 30%, or within a few ticks of the long-term average). The ICE sentiment index, which measures the number of puts purchased vs. calls, recorded similar pessimism. No doubt, confusion about Fed policy, lack of earnings visibility and the election season have been on investor minds.
Foreign stocks in developed markets were mixed, with Europe and the U.K. outperforming, led by better-than-expected company earnings results (albeit with low expectations). Japan earned smaller gains, continuing their woes year-to-date, due to growth concerns, including the PMI contracting and weak trade results. It’s also assumed that a planned sales tax increase might be delayed again for some time (perhaps years) due to these weak conditions, as the last increase by a few percent in 2014 created negative economic results. Emerging markets were mixed, with several nations ending up as the week’s strongest performers, led by India, Turkey and China (non-local shares), while Brazil came in worst in the pack. For the latter, the market run this year based on hopes for governmental change (which has begun to occur) might be another example of ‘buy the rumor, sell the news’ effect.
With interest rates little changed on the week, U.S. bonds barely budged, with government and investment-grade corporate debt performing in line. High yield came in a bit stronger, with continued strength in the oil patch. Despite a slightly stronger dollar, foreign bonds in both developed and emerging markets came in similarly to domestic debt. Year-to-date, returns for bond indexes continue to compete neck-and-neck with equities, led by high single-digit gains from long-term (20-year+) treasuries—although high yield and emerging market bonds have been nearly as strong. In the one significant piece of foreign news, Greece will receive €10.3 bil. in aid through new loans, after the IMF withdrew their opposition to the bailout as the nation tacked on further austerity measures.
Real estate gained generally, with the best results in Europe, followed by U.S. names, although returns didn’t keep up with the broader equity market. Broader Asia gained slightly on net, although Japan and Australia lost ground for the week. Domestically, the more cyclical lodging/resorts sector experienced the best week, while the others were largely undifferentiated, except for mortgage REITs, which lost ground due to more rate hike concerns (unlike equity REITs, which own properties, these provide property financing, so are more interest rate sensitive). Year-to-date, the strongest commercial real estate gains have come from Australia and Canada, which being major commodity producers, have benefitted from a sentiment turnaround in that asset class, although there are concerns about real estate in those regions for a number of reasons—partially due to the commodity correlation, but also the market concentration in development-regulated urban areas.
Commodities continue to move higher, this time led by agriculture, which outpaced energy’s gain of +2%. Corn, cotton and sugar all gained a few percent, with strong export demand and some weather uncertainty. Precious metals lost ground by several percent, as the probability of higher rates loomed, creating tougher competition for low-risk assets. Prices for West Texas intermediate crude touched $50 for the first time since October of last year as the American Petroleum Institute and U.S. Energy Information Administration reported significant drops in crude inventories. Coupled with outages in Canada and Nigeria have led to further narrowing in supply-demand imbalances that started with lower rig counts and now include a few geopolitical catalysts. For oil, or any chart for that matter, round numbers like $50 can be technically significant.
|Period ending 5/27/2016||1 Week (%)||YTD (%)|
|BarCap U.S. Aggregate||0.15||3.40|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
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.