Economic Update 11-07-2016

• Economic news was highlighted by the Fed’s lack of action (which really was no news), while manufacturing activity was again mixed and non-manufacturing/services growth pared back a bit.  The employment situation report again disappointed relative to expectations, but wasn’t a complete loss, either.

• Equity markets declined during the week in both the U.S. and aboard with election jitters and other policy headlines.  Bonds fared far better as interest rates across the yield curve declined.  Commodities fell sharply led by the price per barrel of oil dropping by several dollars on more supply concerns.

U.S. stocks fell negative again on the week, with pre-election jitters (due to Trump’s closing of the poll gap) and a mixed set of earnings reports.  All sectors were down on the week, with materials and industrials sliding the least, while technology, telecom and energy suffered the worst.  Interestingly, the S&P 500 ended down for nine days in a row, which was the biggest losing streak since 1980, although the magnitude of the losses has not been all that extreme.  Interestingly, the earnings tracking firm FactSet noted that fewer firms in 2016 were mentioning the election as a source of uncertainty than four years ago.

Foreign stocks fared far worse than those in the U.S. in local terms, although developed outperformed emerging, and a weakening dollar helped neutralize some of the negative returns for the week.  The closing of the U.S. presidential race also appeared to affect markets abroad to as great or even greater degree than at home.  Emerging markets appeared to be affected by commodity price declines, and to a certain degree perhaps, the higher odds of a Trump victory, which is seen as less favorable for emerging market foreign trade—Mexico has been the poster child for this fear in recent months.

As importantly, U.K. stocks were hit hard even as news during the week included a key court decision noting that ‘Article 50’ (starting the Brexit process) can only be triggered by parliamentary vote, not simply from prime minister action.  This certainly reduces the chances of a ‘hard’ Brexit, relative to fears during the last few weeks, and could likely delay the process further.  Also, as we discussed earlier, the Bank of Japan decided to postpone their set 2% inflation target, in an official acknowledgement of the fact that monetary policies have their limits, and fiscal and structural reforms are also required to spur economic growth.

U.S. bonds performed decently on the week, as interest rates across the curve declined and investors fled risk assets.  Longer treasuries led the way, as government bonds generally outperformed investment-grade credit.  High yield lost ground in keeping with most risk assets, exacerbated by a drop in oil.  Foreign bonds were slightly higher in local terms, but a weaker dollar pushed returns sharply into positive territory.

Real estate lost ground in the U.S., in keeping with broader equities, while a lower dollar helped returns in Asia, Europe and the U.K.  REITs overall have taken it on the chin over the last three months, with a rise in interest rates, with foreign exposure a beneficial addition to portfolios with less severe declines than U.S. real estate.

Commodities fell on the week by over -5%, led by a near -10% decline for the energy sector.  This was offset a bit by positive returns for precious and industrial metals.  Oil prices moved downward from $48.70 to $45.35, with upward estimates for inventories, some lower demand estimates as well as rumors of Saudi-Iranian tension that could undermine the assumed OPEC supply cut agreement.

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.