Economic Update 12-08-2016

• Economic data for the week was highlighted by improvement in several manufacturing releases, as well as in consumer confidence.  Friday’s employment situation report came in not far from expectations, surprising neither on the upside or downside but appeared likely strong enough to keep the potential Fed rate increase in play for December.

• Equity markets took a breather in the U.S. and abroad, following post-election positivity.  Bond returns were flattish, while commodities gained due to oil prices jumping significantly after announced OPEC production cuts.

U.S. stocks fell back last week, as some of the Trump-oriented gains came back to earth somewhat.  Energy was the leading sector, gaining nearly +3% due to oil price increases described below, while information technology was the losing group for the week, due to some perceived earnings uncertainty.  Higher-beta small caps, which had outperformed in recent weeks, significantly lagged large caps.

Foreign stock returns were similar to those in the U.S. on net, but after a sharp decline in the dollar, ended up far more tempered.  Japanese stocks ended up as the best performing by a slight margin, followed by Europe and the U.K.  Emerging markets were mixed, with strength in Russia due to oil prices, while Brazil and Turkey lagged

Interestingly, Italian stocks were among the leaders for the week in the run-up to the Italian referendum, which was voted on yesterday—and failed.  The result would have been to reduce the size of the senate and streamline government by changing legislative duties and was strongly backed by the Italian prime minister (who promised to resign if it failed, and he appears to be holding true to his word).  Then again, Italy has had 65 governments in the last 70 years, so this isn’t as unusual an event as it sounds.  Much of the concern was focused on two things, and these problems remain despite the vote’s outcome:  how this will affect political movements and political sentiment toward remaining in the European Union, and how governmental changes will affect the structure of the Italian banking system, which has been under a high degree of stress in recent years.  It could require a bailout due to bad debts, and EU membership offers the ability to absorb these bad debts under the larger umbrella, while Italy breaking off on its own a la Brexit could be much more troublesome.

U.S. bond prices ticked up slightly, despite rates rising a bit more on the longer end of the curve, despite remaining relatively flat on the short end.  Credit and mortgages outperformed governments, while high yield and bank loans also performed positively and led the broader group.  Developed market foreign bonds gained a bit, while emerging market fixed income was mixed but generally positive, helped by a weaker dollar.

We discussed the dynamics of the bond market last week, and the unpredictability and fickleness of yields persists.  Even the perception that growth or inflation increasing can cause rates to rise, although these can also be quick to adjust should conditions change.

Real estate came in flattish in the U.S., led by gains in cyclical lodging/resorts and brought down by retail/malls.  REITs gained ground in Asia, but lost ground in Europe.

Commodity returns were solidly higher, led by both a weaker dollar and the energy sub-group gaining well over +10% for the week.  Industrial metals and agriculture declined by a few percent each, however, to offset these gains somewhat.  The most anticipated news was the outcome of the Wednesday OPEC meeting, about which opinions concerning potential outcomes had been driving energy price sentiment for several weeks.  It turns out OPEC agreed to cut crude oil production by over 1 mil. barrels a day, or just over -3%, to keep a cap at 32.5 mil.—the first such cut in 8 years.  This boosted prices immediately over above $50, ending the week at $51.70, representing a +12% net increase.  Naturally, the question remains now about how ‘sticky’ this agreement will be and how much cheating happens by other producers to take advantage of the higher prices.

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.