Weekly Economic Update

Economic Update 9-26-2016

  • Economic data for the week was largely focused around the FOMC meeting, where no interest rate policy action was taken.  Several housing metrics came out during the week, to mixed results, with stronger pricing and homebuilder sentiment, but weaker sales volume and starts/permits.
  • Stock markets rose globally with Fed policy holding steady, and Japan going a bit further, although gains were stronger abroad than domestically.  For similar reasons, bonds fared well on the week with the decline in interest rates.  Commodity indexes gained, led by a rise in oil prices.

U.S. stocks largely gained ground on the week, with the lack of FOMC action and dovish Yellen press conference causing interest rates to fall and sustaining positive sentiment for risk assets.  From a sector standpoint, all ended up in the positive, led by several-percent gains in utilities and industrials, while energy and technology experienced only slight gains; the latter was affected by a bearish sales report for Apple’s new iPhone and measurement discrepancies in Facebook user data.

Foreign stocks outperformed domestic for the week, led by Japan and Europe, and emerging markets close behind.  The Bank of Japan held their policy rate steady at -0.10%, but did make some other interesting announcements related to bond market purchases, including changing the goal from the quantity of bond it will purchase to targeting yields directly instead (like keeping the Japanese 10-year government bond at a stated 0%), as well as keeping at it not only until the 2% inflation target is hit, but until it ‘stays above the target in a stable manner’.  This is referred to as letting inflation ‘run hot’.  Consider this a fine-tuning, even a bit of a deepening of QE, and a more flexible method for achieving yield monetary goals, and offers the benefit of longer rates of not falling below zero, which is a benefit to financial firms that have difficulty under negative rate conditions.  Markets seemed to approve.  The problem is coming more from the demand side of things.

U.S. bonds gained ground with the aforementioned decline in interest rates, notably at the longer end of the yield curve, thus helping longer duration debt more than shorter.  Credit, both on the investment-grade side as well as high yield, outperformed governments as credit spreads contracted a bit.  A weaker dollar and Fed sentiment helped foreign bonds outperform U.S. debt, which was more pronounced in the more volatile emerging markets space as credit spreads also tightened.

Real estate experienced a solid week, helped no doubt by a decline in interest rates.  The U.S. outperformed other regions, with gains in healthcare and residential.

Commodities rose slightly, with a tailwind of a weaker dollar and gains almost all groups, including energy, industrial and precious metals as well as agriculture, to a lesser degree.  Oil gained a few dollars a barrel during the week before ending up just +2% at $44.50.  This appeared to be due to an inventory drawdown, and more ‘dramatic’ news surrounded the upcoming OPEC meeting, with a rumor of Saudi Arabia offering to cut production if Iran would agree to doing the same.  Such rumors have a tendency to boost prices higher in the short-term, but often fizzle out based on how valid and probable their occurrence ends up being.  Whether these reports end up being legitimate or not longer-term remain up for debate, especially considering the reluctance of Iran to enter into any deals with its Middle Eastern neighbors, or even cut production to begin with, as it would like to capture as much revenue from oil as it can following the recent reduction in sanctions.

Period ending 9/23/2016 1 Week (%) YTD (%)
DJIA 0.76 6.94
S&P 500 1.20 7.62
Russell 2000 2.45 11.65
MSCI-EAFE 3.15 2.43
MSCI-EM 3.62 15.53
BarCap U.S. Aggregate 0.52 5.73
U.S. Treasury Yields 3 Mo. 2 Yr. 5 Yr. 10 Yr. 30 Yr.
12/31/2015 0.16 1.06 1.76 2.27 3.01
9/16/2016 0.30 0.77 1.21 1.70 2.44
9/23/2016 0.18 0.77 1.16 1.62 2.34

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. 

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