Economic Update 12-27-2016

• Last week’s economic data was highlighted by a slightly-better-than expected durable goods report, stronger housing numbers and a 3^rdquarter GDP that was revised to higher growth than expected.

• It was a slow pre-Holiday market week, with equity markets modestly higher.  Bonds offered equally strong returns as interest rates backed off of highs from the prior week.  Commodities declined slightly, with oil little changed for the week.

U.S. stocks rose slightly on a light volume week, as is typical pre-Holiday.  Telecom, financials and industrials led the way with the largest gains, while consumer discretionary and energy stocks experienced slight declines, although all sectors fell within a relatively tight range of the index.

The Dow Jones Industrial Average, which is probably the most closely watched index from the standpoint of regular media coverage, came close to reaching the 20,000 level—but it didn’t quite get there.  Without going into the intricacies of the antiquated DJIA, which is a price-weighted index and therefore is not extremely useful from a benchmarking perspective.  At the same time, it is among the oldest indexes tracked (it began in the 1890’s), so offers us a contextual tie-in to the past when stock data was spotty at best, and indexes were a new invention that had to be tabulated manually.  This is why the DJIA persists, and every round thousand-point level is usually quite newsworthy.  Of course, the higher the index gets, the less meaningful each 1,000 high water mark becomes.  We don’t know of any institutional managers that benchmark their strategies to it, and since it only consists of 30 large American stocks weighted in an usual manner, it goes without saying that it’s not a great benchmark for a more balanced asset allocation portfolio.

Foreign stocks generally performed in line with U.S. equities for the week, with Europe within a few fractions of a percent in both local and U.S. dollar terms, a stronger yen helped Japanese returns, while a weaker pound hurt U.K. returns somewhat, although local currency returns were among the best in the developed world the week as economic growth game in better than expected.  Emerging markets were defined by sharp declines in India and China, the latter due to growth concerns and debt levels, while Brazil gained due to expectations of further interest rate cuts.

U.S. bonds experienced a strong week as interest rates fell back a bit across the yield curve.  Naturally, longer treasuries earned the strongest gains, but all other groups, including mortgages and corporate credit all saw positive returns, as did high yield and bank loans.  The dollar was mixed on the week versus a variety of major currencies, which led to decent performance from foreign bonds on a local and USD-denominated level—in both developed and emerging markets.

Real estate ended flattish to slightly negative in the U.S. (depending on the index used), with mortgage REITs gaining due to lower interest rates and retail/regional malls declining sharply due to some concerns over holiday shopping results.  Abroad, both European and Japanese real estate earned strong gains, while other peripheral regions were more tempered.

Commodities lost ground on net during the week, led by strength in energy (mainly natural gas, due to cold weather nationwide) and weakness in industrial metals and agriculture.  The price of crude oil, a primary driver of the GSCI index, was little changed on the week, gaining a few pennies to just over $53/barrel.  In the industrial metals group, Chinese imports declined, and Indonesia had banned exports of several metals such as nickel, but decided to loosen restrictions to lessen market impact, which may have played a role in the price decline.  Industrial metals have been on a tear as of late, so consolidation here is not entirely surprising.

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.