Economic Update 8-22-2016

• Economic data for the week showed a combination of strength in housing and jobless claims, continued mixed results in manufacturing, and tempered consumer inflation.  The FOMC minutes showed conflicting opinions, which has carried over into recent Fed member communications.

• In continued low-volatility summer equity market activity, stocks were slightly higher in the U.S. and emerging markets, and lower in the developed markets generally, even with help from a weaker dollar.

U.S. stocks were generally flattish on the week, with small caps performing a bit better and beating large caps.  Energy and materials led the way with strong gains, while defensive utilities and telecom lagged with losses on the week.  While the S&P has been in a typical low volatility summer pattern as of late, interestingly, it hasn’t moved more than 1% on any given day for the past month, which is a bit unusual.

Foreign stocks outgained domestic, led by the U.K., with a strong retail sales showing, and emerging markets, while Japan and Europe underperformed the U.S. during the week.  A falling dollar generally helped the cause, while Japan experienced a disappointing GDP result of +0.2%, compared to an expected +0.7% for Q2.  Peripheral Europe was an area of particular weakness, while Chinese stocks were among leaders, reaching 7-month highs upon the Shenzhen-Hong Kong Stock Connect being formally announced, for launch likely later in the year.  These types of market efficiencies are seen as improving liquidity and access to formerly hard-to-access Chinese domestic stock market shares.

U.S. bonds lagged with interest rates rising; in some part due to differing commentary from a few Fed officials pointing again to September as a meeting ‘in play’ as noted above.  Treasuries and investment-grade corporates both lost some ground, while high-yield bonds provided gains.  Foreign bonds fared well in both developed and emerging markets with the dollar’s decline.

Real estate in the U.S. fell back by over a percent, with losses in Europe and Asia less dramatic.  Recently REITs have taken a bit of a pause following strong gains so far in 2016, with U.S. indexes up in the 10-15% range, led by healthcare, industrial and mortgage REITs, while residential/apartments has cooled off with supply beginning to catch up with demand and rent increases tapering off in some key areas, like San Francisco and other hot rental markets.

Commodities experienced a positive week, with a tailwind of dollar weakness and strength in crude oil.  The West Texas per barrel price rose from $44.50 to $49.10—a 10% gain and 8-week high—with continued speculation about a possible OPEC member deal to reduce production in order to prop up prices.  Such rumors change week-to-week, however, and thus account for the volatility in futures markets.  Nonetheless, oil has found a somewhat comfortable trading range between $40-50 as of late.  Metals also fared well on the week, as did agriculture, with the dollar being a likely tailwind.

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.