Economic Update 1-17-2017

• For the week, economic data included moderate retail sales, some gains in producer prices, stronger small business sentiment and continued strong labor results.

• Stock markets were mixed on the week, with foreign equities outperforming U.S., with help from a weaker dollar.  Interest rates ticked downward, which helped bonds earn slightly positive returns.  Commodity returns were also mixed, as crude oil prices ended down a few percent.

U.S. stocks ended up mixed on the week, with large caps losing a bit of ground and small caps gaining.  From an S&P 500 sector perspective, ‘growth’ segments technology and consumer discretionary outperformed with stronger gains, while energy lagged with nearly a -2% decline.  Healthcare continued to experience some mixed results, despite solid fundamentals, due to Trump’s comments about drug pricing.  With 4^th quarter company earnings beginning to roll out, these could be a focus for the next few weeks.

A falling dollar, on the order of nearly -1%, mostly against the Japanese yen, boosted returns of foreign equity indexes.  Emerging markets, such as Brazil, China and India generally fared better than developed markets, as improved data has raised hopes for a bottoming of cyclical conditions in these markets.  This has been the story for the past year for the most part, aside from the more recent hiccup from uncertainty about Trump’s trade policy.

U.S. bonds rose a bit as interest rates ticked slightly lower across the curve.  As expected, despite the very small change in yields, longer duration benefitted a bit more than shorter, with little difference between governments and corporates.  Foreign bonds were flattish in local terms, but the weaker dollar was additive to returns for U.S. investors in almost all regions, developed and emerging.

Real estate lagged with negative returns of a few percent on the week in the U.S. and Europe, but slightly better results in Asia.  Lodging and mortgage REITs continued their strong recent performance (due to expectations for improved economic growth), while the retail sector continued its struggles—per the dynamics noted earlier.

Commodities indexes were mixed for the week, despite the tailwind of the dollar decline.  Crude oil dipped by a few dollars early in the week before recovering slightly to $52.40/barrel by Friday, resulting in a net decline of about -3%.  The drop primarily appeared to concerns over OPEC production cuts actually taking place (perceptions vs. reality about this situation continue to be a key driver of crude week-to-week).  Natural gas, however, gained due to severe weather across the nation.  Other groups were generally higher, including agriculture, precious metals and, especially, industrial metals as Chinese imports increased.

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.