Economic Update 10-03-2016

• In week packed with economic data, results showed weaker housing numbers for the prior month, flattish personal income/spending but somewhat stronger industrial numbers and consumer sentiment, and continued strong/low jobless claims.

• Equity markets experienced small positive gains in the U.S. and were mixed overseas in a see-saw type week.  Bonds gained a bit as well, with interest rates declining slightly worldwide, with U.S. corporate high yield leading the way.  Oil prices jumped by several dollars upon OPEC members seeming to agree on production cuts.

U.S. stocks gained slightly in an up-and-down market week to end the quarter, with carryover from the presidential debate early in the week and later concern over the condition of Deutsche Bank.  Energy stocks experienced gains of close to +5% on the week, corresponding to gains in oil prices, while utilities lost significant ground on the week.

Foreign stocks lost ground slightly, with the U.K. flattish, with economic growth coming in better than expected, but Europe and Japan losing ground.  Deutsche Bank was in the news as stocks tumbled on Thursday due to news of a fine from the U.S. Dept. of Justice of $14 bil. as a penalty for its role in the U.S. housing crisis a decade ago, and subsequent worries about the firm’s liquidity—and affecting the broader financial sector.  However, it turned out the two parties settled on a much lower fine (in the neighborhood of $5.4 bil.) so some fears were alleviated by the end of the week.  Emerging markets sold off a bit more than developed markets, led by weak results in China not helped by the choice of FTSE Russell to continue to exclude the Chinese A share markets from their index series (for the same reasons of lack of transparency, restrictive capital controls, market interventions, etc. that also kept MSCI from adding these to their indexes).  Indian equities were affected somewhat by cross-border military tensions with Pakistan.

U.S. bonds were little changed as rates declined slightly on the longer end of the yield curve.  High yield corporate bonds experienced a continuation of their upward momentum as of late, with the best performance of the week, while investment-grade corporate and treasury bond indexes also came in slightly positive.  Foreign bonds in developed markets fared decently with lower rates, while emerging market indexes ended mixed.  Interestingly, the Mexican central bank raised their base rate by +0.50% to 4.75% in order to help defend recent weakness in the peso, which is  now at an all-time low, and possible future volatility due to ‘possible consequences of the electoral process in the United States.’  One can only imagine that the maligned peso might not fare well in the immediate aftermath of a Trump win.

Real estate lost ground in the U.S., largely as a result of the retail and lodging sectors, which tend to be more sensitive to economic spending data.  Foreign REITs held their ground much better, with positive results in developed Asia.

Commodities gained a few percent, led by increases in energy and industrial metals, while precious metals and agriculture declined.  Oil, the typical driver of commodity indexes, experienced gains of almost $4/barrel to just over $48.  The OPEC meeting in Algiers was subject to some mixed rumors during the week, but the group appeared to agree on a production cut—the first one in 8 years.  This immediately pushed up crude oil prices by +5%.  Despite the somewhat-of-a-surprise announcement, such moves are often short-term and stated production cuts may not even be that applicable, due to the known incessant  ‘cheating’ of various OPEC members (it’s in their best interest to produce more to earn more needed revenue).  So, we’ll see how much this really matters in the longer-run.

The third quarter overall was productive for a variety of asset classes, particularly in the ‘risk’ sectors such as U.S. and foreign equities.  Performance for fixed income was largely flattish, with rates ticking up slightly; however, positioning in government, muni and corporate bonds fared well in relative terms—high yield corporate bonds especially so.  Domestic real estate cooled off, losing ground for the quarter, but was helped a bit by an allocation to foreign names which experienced gains.  Commodities positions ended up nearly flat, despite indexes losing some ground during the quarter; this was mostly due to weakness in agriculture, as energy was little changed on net.  Our asset allocation summary will be forwarded on in the next week or so, which describes portfolio asset class results in greater detail.

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.