Economic Update 9-06-2016

• In a busy week for economic data, general results weren’t as strong as expected, but neither were there any outright trouble spots.  The ISM manufacturing index weakened by a few points, housing proved mixed but stable and the employment situation report disappointed a bit compared to expectations.

• Equity markets generally ended up in the positive globally, as did domestic bonds, while foreign bonds were mixed due to a stronger dollar.  Commodities, led by oil, were generally down on the week.

U.S. stocks marked gains, ending another low-volatility end-of-summer period.  This was helped on Friday with the less-than-stellar jobs report providing some hope of a delay in the Fed hiking interest rates, and keeping the extraordinarily accommodative policy alive for a bit longer.  This market reaction effect of lower for longer rates is broader than it might seem and trickles down to several areas—including upward pressure on U.S. stock prices, a less-strong dollar (not necessarily weak but tempered gains at least as those could require higher relative interest rates), and stronger commodity prices absent other short-term dynamics (affecting gold mostly).

From a sector standpoint, financials led by gaining a few percent on the week, followed by materials, while energy and health care lost slightly.  Retail earnings continue to be an area of investor focus with divergent results and comments from the auto industry that sales may have already peaked and begun to level off.  Probably the most interesting piece of stock news for the week was a European Commission court decision to fine Apple 13 bil. euros ($14.5 billion) based on Ireland’s providing the firm ‘selective tax treatment.’  Due to several other large companies using Ireland as a domicile/tax haven, there could be more to come, subject to any appeals from the Irish government and firms themselves.

Developed foreign stock indexes overall gained a few percent in local terms, in Europe and Japan, but much of this was eroded by a stronger dollar.  European economic news was mixed, with investor outflows away from equities in that region continuing, while stocks in Japan were buoyed by further confidence words from the BOJ that more easing could be coming.  This brings up an interesting situation, as we’ve mentioned, with the Japanese government (Bank of Japan and national pension fund) on its way to owning almost the entire domestic bond market and now, indirectly, is the leading shareholder in nearly 500 domestic companies.  This is not only unique due to the size of the ownership stakes, but especially from the fact that pension assets there traditionally have been risk-averse and stock-avoidant (but government pressure seems to have altered this worldview).  Now the purchases have moved to ETFs, in an effort to stimulate pricing upward.  In the U.K., a stronger pound had the opposite effect as stocks outperformed due to a stronger-than-expected manufacturing report.  Following strong year-to-date performance, flows have continued into emerging markets for a record ninth consecutive week, which is the strongest stretch in half a decade.

U.S. bonds were little changed to slightly positive during the week as rates dipped and rose again by week’s end, just a touch lower than where they began.  High yield corporates led, with the strongest performance in the group, and credit overall outperformed government bonds slightly.  With a headwind of a stronger dollar, locally-denominated foreign bonds in developed markets performed negatively, while USD-denominated emerging market debt showed small gains.

Real estate gained ground on the week in the U.S. and Europe, while Asian REITs lost ground due to losses in Japan and Australia.

Commodities fell, led by a decline in the energy and agriculture sectors, while precious metals gained.  Crude oil fell by –7% to the $44.50 range, upon news of rising U.S. inventories over the past week which offset continued talk of an OPEC cut in output; mediocre jobs news that kept the dollar contained also acted as a boost on Friday.  To no surprise, there continues to be a difficulty in formulating a broad agreement among oil-producing countries about shared goals (other than wanting prices to rise in order to help their own income statements), although meetings between Russia and Saudi Arabia have raised hopes for some type of production freeze to achieve higher prices.

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.