Economic Update 10-24-2016

• Economic data last week offered mixed results for manufacturing and industrial production, as well as housing, while official inflation picked up a bit due strength in energy/gas prices.  Overall activity as described by the Fed Beige Book was a bit better than the previous month.

• Equity markets were generally positive around the world, with foreign regions outperforming domestic. U.S.  Bonds also fared well with interest rates falling in key portions of the yield curve.  Commodities ended the week flattish with minimal net movement in oil, the usual key driver.

U.S. stocks gained ground on the week with about a quarter of the S&P reporting earnings, which ended up relatively decently.  From a sector perspective, materials, financials and consumer discretionary stocks led the way in terms of gains, while industrials and consumer staples were among the only losing sectors for the week.  Earnings for Q3 have begun to be released, and results so far have been slightly better than the already-tempered expectations.

Foreign stock returns were led by Japan and emerging markets, but Europe and the U.K. also outperformed U.S. stocks for the week.  ECB President Draghi announced that monetary policy was being kept as is, which relieved those fearing a ‘taper’ down from current dramatic easing to something less extreme, although he did admit that it wouldn’t last ‘forever’, and nothing ‘abrupt’ was likely planned when backing off eventually did occur, which didn’t provide a high level of clarity.  Japanese stocks looked to be led by decent earnings results and comments from officials that current stimulus policies remain appropriate and don’t need to be reduced.

In emerging markets, a Q3 growth number coming out of China showing +6.7% was as expected.

Brazil cut their benchmark rate by ¼ percent to 14.0%—the first rate cut in 4 years, mostly due to internal uncertainties surrounding in-progress fiscal reforms—which resulted in positive market reaction.  Mexico also fared well, which has occurred a few times in recent months and coinciding with polls results favoring Clinton over Trump, who is seen as being less favorable to Mexican interests and cross-border trade.

U.S. bonds fared a bit better last week with interest rates falling back somewhat across the longer end of the yield curve.  While all domestic bond categories ended the week generally higher, corporate—particularly high yield—bonds outperformed for the week over governments and floating rate bank loans.  Developed market foreign debt was the lowest-returning group for the week, USD-denominated emerging market debt was the best-performing (as the dollar generally gained ground).

Real estate in the U.S. gained slightly, in keeping with broader equities, but were outgained by Europe and Japan, related to factors discussed earlier.

Commodities rose slightly on the week, with gains in precious metals, livestock and energy offset by losses in industrial metals and broader agriculture.  Copper suffered particularly due to fears of slowing Chinese demand, which is one of the more common catalysts for the metals group in recent years.  Crude oil briefly moved toward $52/barrel with larger than expected inventory drawdowns before settling back to a touch under $51 by Friday, netting out to a minimal change for the week.

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.