Economic Update 4-04-2017

• Economic data for the week was highlighted by stronger manufacturing and housing results, an improvement in consumer confidence to a multi-decade high, while Q4 GDP was revised slightly higher than in earlier releases.

• Equity markets in the U.S. gained, developed markets ended flattish on net and emerging markets lost ground.  The majority of bond indexes were flattish, with very little interest rate movement, while commodity indexes gained generally with a bounce higher in crude oil prices.

U.S. stocks gained on the week, with small caps sharply outperforming large caps.  From a sector standpoint, energy recovered along with gains in oil prices, followed by consumer cyclicals; conversely, defensive sectors utilities and telecom lost the most ground on the week.  Now that we’ve entered April, the focus will likely turn to Q1 earnings, in addition the legislative success of the Trump agenda that’s dominated sentiment over the last few weeks.  Large-cap stocks, and particularly ‘growth’ sectors, fared well during the first quarter, outperforming weaker cyclical sectors such as energy, as well as the mid- and small-cap groups.

Foreign stocks were flattish on net in developed markets, with results hampered by a stronger dollar during the week.  Returns were positive in Europe as sentiment continued to improve due to slightly stronger economic and business fundamentals, flat in the U.K., while Japan lost ground in conjunction with a poor retail sales report.  Emerging markets also declined, in contrast to their pattern so far this year, as India gained but Russia and China fell back.  South Africa experienced an especially poor week, as the finance minister was removed from the nation’s cabinet.  In the 1^st quarter, foreign stocks were the shining stars of the asset class universe, outgaining all other groups—in a welcome change of equity market leadership.  Emerging markets outperformed developed markets, as lower valuations and anticipated bottoming of fundamentals spurred investor flows.

U.S. bonds on the investment-grade side were little changed on the week, as interest rates were flat along the yield curve.  High yield bonds, however, gained ground in line with stronger oil prices, and bank loans gained a bit more ground than conventional debt.  Foreign bonds in developed markets gained a bit in local terms due to lower inflation readings, which lowered yields, ended up lagging overall due to a stronger dollar, which was even more evident in emerging markets.  During the first quarter, bonds were plagued by uncertainty surrounding interest rates and eventual Fed action.  This ultimately led to corporate credit outperforming government debt, with especially strong results from high yield and floating rate bank loans, compared to the broad Bloomberg Barclays U.S. Aggregate index.

Real estate in the U.S. gained generally on par with broader equities, while foreign names were negatively affected by a stronger dollar somewhat.  Mortgage and lodging REITs continued their lead, while residential pared back.  The losing group of the quarter was retail/regional malls, which we’ve talked much about.

Commodity indexes rose last week.  West Texas crude rose +5% from $48 to $50.60, helping to drive the energy component higher, as inventories grew at a slower rate than expected and expectations persisted that OPEC would extend their policy of production cuts.  Metals also gained ground, despite a stronger dollar, while the agricultural segment was the only loser for the week, mostly due to a decline in the prices of soybeans and sugar.  In the quarter, commodity indexes lost ground, but mostly due to the negative prices influences of crude oil and natural gas, which are larger components.  Metals, both industrial and precious, fared quite well so far in 2017, while agricultural contracts were mixed and largely weather- and region-dependent, per usual.

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.