Economic Update 9-19-2016

• There were a flurry of economic data releases last week, with results tilted toward the negative—included were disappointments in retail sales and manufacturing, while consumer sentiment was a little better than expected, and jobless claims remain very low.  Inflation also remains flattish, in line with the recent cyclical trend.

• Equity markets experienced more volatility than during the last few summer months, but gained a bit on net in the U.S., while generally losing ground overseas.  Bonds experienced a lackluster week as well, upon higher interest rates.  Commodities lost ground thanks to a weaker dollar and higher perceived oil supply conditions.

Following the prior week’s rate scare, U.S. stocks continued their almost-immediate pickup in post-Labor Day volatility.  On a broad scale, they ended up in the green, with strong gains from technology and utility stocks, while energy stocks declined several percent.

Foreign stocks generally lagged on the week, with Europe/U.K. and Japan performing the worst, down several percent, and emerging markets only suffering minimal losses.  Following policy meetings, rates in both Britain (0.25%) and Switzerland (-0.75%) were kept unchanged, with QE continuing in the U.K., while the Swiss promised to intervene in currency markets if/as needed.  They have a habit of this, as the Swiss franc is viewed as a global safe haven currency, but it’s also a much smaller nation, so small dislocations can have a much larger domestic impact.  Rates have risen somewhat in European markets as of late, in a reversal of recent trends, as some have questioned the ability of central banks to utilize such low rates as an effective policy tool.  Therefore, the number of negative yielding bonds has fallen a bit globally.  Russia also cut rates for the second time this year, by -0.50% to 10%, in response to the weak recovery yet also low inflation pressures.

U.S. bonds lost a bit of ground on the investment grade side, as rates ticked upward at the longer-end of the curve—perhaps due to minor inflation influences.  The early part of the week was dominated by a speech given by another Fed governor, Lael Brainard, which tilted sentiment in a dovish direction, noting that stronger consumer spending and higher inflation trends would be desirable prior to any rate moves.  Per the pattern in recent weeks, though, floating rate bank loans gained slightly, resulting in the best fixed income segment performance for the week, while the lower-quality and energy-dominated segment of high yield lagged.  Munis also lagged a bit due to a glut of new supply entering the market last week ($12 billion, the highest volume week of the year thus far).  Foreign bonds generally lost ground across the board, roughly equivalent to the strength in the U.S. dollar, which gained just under a percent on the week.

Real estate generally lost ground during the week, as interest rates perked up.  However, U.S. names fared better than international, where losses were pronounced in the U.K. as well as Australia and Canada, who typically suffer when oil prices decline.

Commodities lost ground during the week, likely not helped by positive movement in the dollar.  While the agriculture and industrial metals groups gained, precious metals lost ground, as did energy.  The International Energy Agency reported an opinion that the current glut in oil supplies could well continue through at least the next year, or perhaps two, which served to lower crude oil prices by over -6% to $43/barrel for the week.  Natural gas, on the other hand, rose by +5%, due to the opposite dynamics of supply tightening and expected warmer weather next week in parts of the country.

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.