Economic Update 8-29-2016
- Economic data for the week was decent with strong reports from durable goods, new home sales, and jobless claims while existing home sales came in a bit weaker. Fed Chair Janet Yellen’s speech at the annual Jackson Hole conference alluded to a desire to perhaps boost rates sooner than year-end.
- S. equities declined on the week with a higher probability for rate hikes, while foreign stocks generally fared better. Bonds were also relatively flattish in both the U.S. and abroad. Commodities were also hurt by the dollar with crude oil prices declining a few percent.
U.S. stocks largely declined on the week in the large-cap group, although small-caps ended slightly positively. From a sector perspective, financials and technology were the only sectors ending in the green (the former due to better chances of a rate hike most likely, improving their business outlook), while defensive utilities and health care lost the most ground. For the latter, biotech was negatively impacted by further comments by Presidential candidate Clinton regarding drug price increases in the sector (in this instance, EpiPens), which raises concerns over possible future government actions to limit profitability.
With low summer volatility continuing to be the trend, investor attention was focused on Fed Chair Janet Yellen’s remarks at the annual Jackson Hole conference hosted by the Fed and consisting of a variety of global central bankers and special guests. These comments included that the ‘case for an increase in the Fed Funds rate has strengthened in recent months’ was taken by the market as a probability-raiser for September. Regardless, chances of another hike this year, whether it be Sept. or Dec., have increased as economic data has improved somewhat, and, more importantly, the global capital market fallout from Brexit appears to be surprisingly contained. However, and also noted in Yellen’s remarks, any movement in rates continues to look measured in keeping with less-than-spectacular growth and inflation readings. The road to ‘normalized’ rates could continue to be a long one.
Foreign equities gained ground in Europe and the U.K., with Brexit continuing to be a low-level concern. Emerging markets underperformed developed markets, namely in China and Latin America, the latter of which were hampered by lower commodity prices. Japan continues to struggle; while in USD terms, due to a strong yen, indexes show a slight positive result year-to-date, while local equities are down -15%. Skepticism continues to fester surrounding the Japanese government’s ability to generate some type of inflation or economic growth—so far efforts have been ineffective. Interestingly, the governor of the BOJ noted last week that there could be room for another interest rate cut (taking rates even further negative). Economists continue to debate the effectiveness of a ‘deep’ negative interest rate policy.
U.S. bonds were little changed, with rates ticking a bit higher in the belly of the yield curve. Interestingly, similar to the equity market, the last month has been the least volatile for long-term Treasuries in the last 30 years. Credit fared better than governments, with high yield indexes ending the week with positive returns, followed by positive results from floating rate bank loans. Foreign bonds in local terms performed similarly, but were negatively impacted by a stronger dollar, in both developed and emerging markets.
Real estate lost ground in the U.S., albeit to a lesser degree than general equity markets. Results in Europe and the U.K. gained, while Japanese REITs suffered. During the last several months, results in the apartment/residential sector have flattened, while more economically sensitive lodging/resorts and healthcare have outperformed as of late. As discussed earlier, we could see enhanced visibility of real estate due to its inclusion into the S&P as its own sector, while continued low interest rates and low levels of incoming commercial building supply are other important tailwinds.
Commodities were also impacted by a stronger dollar, with the entire group losing ground, including agriculture, metals and energy generally. Crude oil fell back by about -3% to $47.60 due to a stronger dollar and lack of change in weekly rig counts; natural gas, however, bucked the trend by gaining over +10% due to warmer weather in the U.S., which boosts air conditioning demand.
|Period ending 8/26/2016||1 Week (%)||YTD (%)|
|BarCap U.S. Aggregate||-0.15||5.52|
|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.