Economic Update 10-17-2016

• In a lighter week for economic data, retail sales came in stronger than in the previous few months, but remained lackluster.  Producer inflation picked up slightly, consumer sentiment fell a bit while labor was mixed with a drop in job openings but continued low jobless claims.

• Global equity markets generally lost ground on the week, foreign markets outperforming U.S. in local terms, but the gains being reversed by a stronger dollar.  Bonds were mixed, with small positive results in the U.S. and losses in foreign debt due to the dollar effect.  Crude oil gained ground again, leading the commodity group upward.

U.S. stocks declined for the week, with a few earnings disappointments and concerns over Chinese export and growth data.  Utilities led the way, as the only sector with positive returns for the week, while health care incurred the most damage, down over -3%, due to some earnings concerns—earnings will take on a renewed focus in the coming few weeks as we enter the sweet spot of Q3 company results.  Higher-beta small caps underperformed larger-caps, although they’ve still retained an edge year-to-date.

Foreign stocks also experienced negatively, with Europe ending up the best of the lot, followed by Japan, emerging markets and U.K. trailing the pack.  A sharp gain in the U.S. dollar during the week acted as a headwind on the foreign side.

U.S. bonds earned minor gains, except in longer-term government bonds due to a steeping of the yield curve higher in the 10-year and longer range.  On the investment-grade side, credit outperformed governments as spreads contracted, with floating rate bank loans retaining its positive momentum of recent weeks.  Foreign bonds lost significant ground with the stronger dollar for the week—more so in developed markets than in emerging.

U.S. real estate experienced gains during the week, in contrast to broader equities, with residential/apartments experiencing the strongest gains, while regional malls/retail came in behind in keeping with the mediocre retail sales reports.  Asia and European REITs, however, declined, due to currency impact.

Commodities in general ended in the positive for the week, with strong gains in agriculture and energy, while industrial metals lost ground for the period.  Crude oil experienced an unusually high spike early in the week before coming down to earth by Friday, gaining just +1% to $50.35.  Interestingly, based on Baker Hughes rig counts, it’s been about four months without a cut in rig counts, although there haven’t been a lot added, either, which points to some but not extreme rising U.S. production.  On the other hand, production looks to be rising at a steadier pace in areas like Libya, so there looks to be continued back-and-forth on supply speculation going forward.

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.