Economic Update 8-15-2016

• Economic data for the week included a flattish/disappointing retail sales report and continued weak productivity, but, on the positive side, ongoing strong labor market metrics.

• U.S. equity markets reached new highs again for the week, before pulling back to flattish returns; foreign stocks outperformed, with generally positive gains globally.  Bonds gained some ground with interest rates falling.  Commodities with help from a weaker dollar and higher oil prices.

U.S. stocks ticked slightly higher on the week as a small boost from department store retail stocks led sentiment.  These have been an area of investor concern, as the intense growth of online retail has pressured the group—as commented under the retail sales note above.  Announced store closures by larger firms, such as Macy’s, appears to have pleased investors looking for cost savings and further consolidation in the industry.  Overall, the energy and consumer sectors led the way with the largest gains in the S&P, while financials, materials and healthcare lost just over a half-percent on the week.

For Q2 earnings season as a whole, it was the 7^th consecutive quarter with negative year-over-year growth, with a net result of -1% (ex-energy, it was +1%).  Sales improved, however, with a flattening of the negative effects of a strong dollar from the prior period.  Health care, materials and consumer discretionary bucked the trend with year-over-year earnings growth of near or a bit over 10%, energy lost ground with write-downs of energy assets, and the bulk of other sectors ended up with growth in the low-to-mid single digits.  Guidance for the second half of the year remained tempered, even if a bit better than the first half, as poor results from energy especially begin to trail off.

Foreign stocks dramatically outperformed U.S. equities, with gains in Europe, Japan and the U.K., in addition to strength in emerging markets.  A decline in the dollar aided in this effort, as did reports showing German growth was better than expected (at +0.4% for Q2), while other regions and data was mixed.  Debate continues in Japan regarding further stimulus measures, how extensive these might be, if they’ll be large enough—and much of that is economic data-dependent.  Although growth in China has continued to slow, hopes for additional stimulus before the end of the year has buoyed sentiment somewhat.

U.S. bonds generally experienced a decent week with rates ticking downward, notably at the longer end of the yield curve, with help from lower PPI inflation and retail sales readings that depress perceptions of economic growth.  Investment-grade and high yield corporates generally outperformed government bond indexes, except for the longest bonds, as credit spreads shrunk.

Foreign bonds rose, mostly through the help of a weaker dollar, benefitting USD-denominated debt for the most part, although emerging market local bonds fared decently also as credit spreads contracted.  Interestingly, the Bank of England’s new scheme of bond-buying ran into some difficulties, due to a reluctance of owners to sell their bonds (considering that U.K. rates are higher than many in the rest of Europe, rendering British relatively more attractive).  In another unique twist, Japan’s largest bank discontinued their program as a primary dealer of Japanese government bonds as it was determined an increase in interest rates by several percent would wipe out significant bank capital.  This is the basic problem with very low/negative interest rates—not much good can happen with owning such bonds unless rates fall further into the negative.  At the current pace of their purchases, the Japanese government could eventually become virtually the sole owner of these bonds.

Commodities gained on the week broadly with an improvement in the price of crude oil, which ticked higher from $41.80 to $44.50—a 6.5% gain—based on rumors of OPEC/Saudi Arabian agreements to adjust production boosted prices later in the week.  Gold, a darling of 2016 thus far, fell back as investors preferred risk assets for yet another week, as the broader metals groups both lagged.

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.