Economic Update 2-13-2017

• In a very light week for economic data, import prices were relatively contained, sentiment fell a bit, labor metrics JOLTs and jobless claims continued to show strength.

• Equity markets gained during the week, in the U.S. and even more so abroad.  Bonds also fared well, with interest rates ticking down.  Commodity prices rose a bit, despite a stronger dollar, with oil ending flattish on net.

U.S. stocks experienced another positive week, led by hopes later in the week of a ‘phenomenal’ Trump tax policy, including discussions about entitlement reform with fellow Republicans.  Cyclical industrials, consumer discretionary, and tech led the way, with gains well over a percent on the week, while energy and materials ended up laggards with flattish results to losses.  Interestingly, the S&P has gone almost 40 trading sessions without a swing of +/-1%, which is the longest run of the sort in its history (so we know we’re overdue for some volatility at some point).  The VIX, which is the index that measures implied vol in the pricing of S&P options, has been hovering again at very low levels, in the low double-digits.  This doesn’t mean we are necessarily on borrowed time for a bout of choppiness, but we know that markets can’t experience everyday flat seas forever.

Foreign stocks continued to offer attractive results relative to domestic names, with emerging markets, U.K., and Japanese equities experiencing the strongest gains, and Europe ending up as the only major group in the negative, which was mostly due a weaker euro.  European economic and earnings results can in a bit better than expected, which has helped the recovery in equity prices as of late.  In EM, China and broader Asia Pacific gained, with help from stronger trade data in the area.

U.S. bonds fared well during the week from a performance standpoint as interest rates declined across the middle and longer end of the yield curve.  Both government and investment-grade credit both performed largely in line, both of which outperformed bank loans and high yield during the week.

A stronger dollar during the week acted as a headwind to foreign bonds, creating positive returns of up to a half-percent, similar to domestic returns, becoming losses when translated to the USD-denominated variety.  With less of a currency impact on the week, EM debt generally retained their gains.

Real estate gained on the week, with help from a pro-risk sentiment and lower interest rates.  U.S. REITs gained over a percent, similar to Europe, while Asia fared better with stronger regional trade news from China, that can affect pricing for key REIT markets in Australia, Hong Kong and Singapore, in addition to Tokyo.  Domestically, residential/apartments gained, while retail slid a bit again and keeping their place as the worse-performing real estate segment intact (albeit with still a positive year-over-year gain).  Due to long-term fundamental concerns, underweights to mainstream retail assets have been a help to portfolio positioning in the real estate asset class.

Commodities ticked higher during the week, despite the headwind of a stronger dollar, that can have mixed effects in this space.  Energy and precious metals were the leading segments during the week, with a sharp increase in the price of unleaded gasoline, with gains over a percent, while industrial metals and softs lost ground—the latter mostly due to a stall in sugar, which gained over +50% over the past year.  West Texas crude oil prices dipped by nearly $2 mid-week, before recovering close to where they started at $53.90, close to a high point in a trading range of roughly $50-54 that has been in place since December.

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.