Economic Update 2-21-2017

• In a busy week for economic releases, several manufacturing indexes shined with strong results, inflation came in stronger than in recent months, and housing numbers were a bit mixed.

• U.S. equity markets again showed strong gains, although foreign stocks also came in positive.  Bonds were flattish with little changes in interest rates, although high yield bonds continued their momentum.  Commodities fell on the week, although crude oil prices were little changed.

U.S. stocks experienced yet another solid week, with gains over a percent and little volatility.  Corporate earnings for the prior quarter came in at their best pace in over two years, showing growth year-over-year of 8-9% generally.  Even Janet Yellen’s congressional testimony, which was mixed to a bit hawkish, didn’t deter market gains.  From a sector standpoint, financials and health care showed strength with gains of several percent, with hopes for higher rates for the former and biotech/pharma for the latter, while energy lagged as the sole loser during the week, down nearly -2%.

Foreign stocks also fared positively, to a lesser degree than U.S. equities, with strength in Europe and the U.K., while Japan lagged during the week.  Emerging markets fared the best yet again, in keeping with recent trend, as hopes for stronger global growth and cyclical influences will translate to better conditions in those areas; keeping in mind that sentiment over the last several years had been so low that it was hard to imagine much worse priced in.  Sentiment has been improving in Europe with stronger earnings for the prior quarter, although projected real GDP remains in the half-percent range it’s been in for the past several years with no strong catalysts upward.  Japanese results lagged as GDP came in positive, but weaker than expected, with domestic consumption looking flattish, which is a concern for underlying growth fundamentals.

U.S. bonds were mixed and generally slightly negative on the investment-grade side, as interest rates ticked up slightly across the yield curve.  High yield corporate debt bucked the trend, gaining about a quarter-percent on the week, followed by bank loans, both of which have continued strong momentum in recent months.  Spreads have moved higher in key European markets Germany and France with the upcoming election in France showing support for populist rhetoric (as it is in Italy as well), which is a negative for the euro.  Emerging market bonds sold off somewhat during the week.

Commodities indexes declined on the week, with gains in gold and silver but sharp declines in industrial metals, agriculture and energy—the latter due to declines in natural gas prices.  Crude oil bounced around little changed on the week, ending just short of $54/barrel.

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.