Economic Update 6-20-2016

• The week was highlighted by the FOMC meeting, at which no interest rate policy changes were made. In other data, retail sales surprised on the upside, manufacturing and production data were mixed, and inflation came in little changed as expected.
• Markets suffered through a week of negativity generally due to the mixed economic data, digesting of Fed communications and heightened ‘Brexit’ concerns. Bonds fared better with lower rates, especially abroad, while commodities fell slightly as oil production and inventories appeared to pick up.

U.S. stocks were generally negative on the week as ‘Brexit’ fears led sentiment; the Fed decision was largely anticipated, so did not appear to play as large of a role. Defensive utilities led with gains on the week, followed by a flat result for energy, while health care and financials lagged with losses in the -2% range. The corporate news of the week was that Microsoft agreed to pay $26 bil. to acquire social media firm LinkedIn (representing a large premium to the market share price); apparently the price got that high due to the reported presence of other bidders.
Foreign stocks were generally lower in developed Europe and Japan as well, although losses in the U.K. were minimal, with poor returns related to Brexit concerns early in the week followed by a recovery towards the end. Emerging markets also lost ground, but tended to outperform the bulk of developed regions.
In an update to what we mentioned last week in regard to MSCI’s potential inclusion of Chinese A-shares, the firm decided to again hold off. Despite some pressure to include this large and growing market, it was liquidity that resulted in the postponement. The Chinese government’s monthly limit on repatriation of capital remains a hurdle—mostly due to the inflows of capital that would result from index funds, ETFs and other managers that track the MSCI EM benchmark. A key consideration for any benchmark index is that it needs to be liquid enough for widespread use by a variety of market participants around the world; restrictions of any kind are a problem. Chinese officials obviously were hoping for the index’s inclusion for further global legitimacy, as well as to boost returns for the A share market, which is one of the worst-performing (-40%) over the past 12 months.
U.S. bonds gained slightly as yields ticked slightly lower on the week with the Fed’s non-action, with treasuries leading credit. High yield lost ground during the week, coming in at the bottom in terms of performance, losing nearly a percent. Foreign developed market bonds experienced a strong week due to a weaker dollar and as yields moved sharply lower in Europe—the German 10-Year Bund hit a negative yield for the first time, alongside Brexit concerns. Emerging market bonds were mixed, but generally lost ground.

U.S. real estate bucked the negative equity trend by coming in positively for the week, no doubt helped by the Fed’s non-action and cautious language, which removes a key risk for REITs of rising rates. Year-to-date, domestic real estate has continued to be one of the better-performing segments in asset allocation portfolios. Foreign real estate, on the other hand, lost several percent on the week, in keeping with challenged sentiment of foreign equities in general.
Commodities lost ground on the week, as positive results from precious and industrial metals, as well as the agriculture sector, were offset by price declines in crude oil, which vacillated by a few dollars in the upper $40’s to end at $46.60. Production is being restored to several areas of recent outages, such as Canada and Nigeria, which led to concerns over the boost in new supply.

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.