Economic Update 2-06-2017

• Economic data for the week was highlighted by a Fed meeting marked by no action, stronger ISM manufacturing data and employment, with middling non-manufacturing, housing and consumer confidence data.

• Equity markets experienced a mixed, flattish week on net, with emerging markets leading the way with stronger returns.  U.S. bonds were generally flat, while foreign bonds and commodities gained in line with a weaker dollar during the week.

U.S. stocks began the week on a lackluster note, due to unhappiness about President Trump’s immigration announcements the prior weekend, and subsequent backlash by legislators, corporations and others.  The market impact results not so much from the direct soundbites but the potential deterioration in the relationships with other Republican leaders, which could make the pro-growth agenda items more difficult to pass quickly, such as tax reform.  Later in the week, equities recovered on the back of pro-business action on the part of the administration, including promises to attack the recent DOL fiduciary rule and a major scaleback of Dodd-Frank regulation.  These naturally were seen as positives by financial industry and stock market.

Defensive sectors health care, utilities and consumer staples outperformed, with positive returns, while materials, industrials and energy were all down over a percent.  Interestingly, controversy over the healthcare sector continued, with comments from President Trump during the week condemning prices of certain pharmaceuticals as outrageous, but also promised industry executives help in tax reform as well as expediting the FDA drug approval process.

Foreign stocks were flattish in developed markets, with a small positive return in Europe and slight losses in the U.K. and Japan in U.S. dollar terms.  Positive GDP growth was a key focus in Europe, as were earnings, where growth was finally expected to surpass U.S. growth for the first time in at least a year.  The U.K. underperformed with losses for the week, which was related to the discussion of a ‘hard Brexit’ beginning date in March.  Of course, and assuming parliamentary approval, this just starts the clock on an approximately 2-year process during which there will be inevitable twists and turns in the negotiations.  Emerging markets outperformed with slightly better returns, led by market gains in India, Mexico and Turkey—the latter two as the result of central bank currency strengthening measures and rhetoric.

U.S. bonds were little changed across most of the yield curve on net, with the exception of 30-year yields, which ticked about 5 basis points higher.  Consequently, investment-grade bond returns were mixed, with stronger returns from continued strength in high yield debt.  The dollar declined nearly a percent on the week, which boosted the USD-denominated returns for foreign bonds, both in developed and emerging regions, but particularly in the latter.

Real estate generally outperformed broader equities in the U.S., with even stronger results abroad, due to a weaker dollar.  Domestically, regional malls recovered somewhat following a bout of volatility and negative sentiment for brick-and-mortar stores, while cyclically-sensitive lodging/hotels pared back by a few percent.

Commodity sectors generally gained, with a tailwind of a weaker dollar.  This particularly helped precious metals, but agriculture and energy also experienced gains.  Crude oil prices also ticked up slightly on the week, from the lower $53’s to $53.85, or just over +1%.  Energy market sentiment remains extremely sensitive to the balance between OPEC supply cuts and increasing swing supply from areas such as U.S. shale.  The Saudis have insisted that 80% of the agreed-upon OPEC cuts have happened, in addition to production cuts by Russia last week, while the U.S. rig count has also jumped in recent weeks, adding to the supply gap somewhat and likely keeping price increases in check.

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.