Economic Update 4-17-2017

• Economic data for the week consisted of unsurprisingly weaker retail sales, lower inflation readings via the consumer price index and producer price index, as well as continued strength in labor markets.

• Equity markets lost ground in the U.S. for the most part, while developed and emerging foreign markets generally were flattish.  Bonds fared well in that anti-risk environment, as did real estate, while commodity indexes also gained with help from higher crude oil and gold prices.

On a shortened Good Friday holiday week, U.S. stocks slipped a bit with geopolitical concerns, including U.S./Russian relations over Syria in the aftermath of a missile strike, North Korean tensions which involve the Chinese, as well the surprise news of the largest non-nuclear bomb in the U.S. arsenal deployed in Afghanistan.  Domestically, Trump’s comments that the dollar was getting ‘too strong’ and hoped that the Fed would keep interest rates low, weighed on markets somewhat.  Typically, Presidents have not tended to weigh in on either matter, especially in regard to Fed policy.  Several of these wildcards have added to market uncertainty, which can lead to more volatility.

From a sector perspective, consumer staples and utilities ended the week as the only positively-performing areas, while financials and materials suffered the most severe declines, at close to -3%.

Foreign equities were mixed on the week, with negative returns in Europe, Japan and the emerging markets translating to flattish to slightly-positive results on net with accompanied by a weaker dollar for the abbreviated week.  Trump’s comments about the strong dollar didn’t help sentiment, while influences were similar to those in the U.S., including a pareback in the financial sector as rates fell.  The upcoming first round of the French election on Sun., Apr. 23, appears to weigh on investors as well, with a far-left Bernie Sanders-like candidate gaining ground against the more centrist candidates just when the far-right populist candidate was losing ground.  The candidates at both extremes are less pro-euro than the centrists, which explains the market volatility surrounding polling results.  Brazil and Russia were the laggards that pulled down EM returns generally.

U.S. bonds experienced a positive week, contrary to the equity sell-off and risk-off flows.  Rates fell across the curve, the 10-year note’s yield to a 5-month low.  This resulted in outperformance for long treasuries, but also positive returns for investment-grade debt in general.  High yield corporates and floating rate bank loans were generally flat on the week.  Foreign bonds experienced similar themes, with a flight to quality effect seeing assets move toward government bonds in the U.K., Japan and Australia, while European bonds were mixed due to the election uncertainty.  One measure of this concern—the yield spread between France and Germany (France being the ‘higher yield’ credit)—has moved from about a quarter-percent last fall to touching a half-percent recently.

Real estate bucked the trend of equity losses by gaining a percent in the U.S., and more internationally, with help from a weaker dollar.  Retail, industrial and office REITs all led the way, while apartments have pulled back somewhat in the wake of rental rates stabilizing around the country due to supply growing to meet demand.

Commodities generally gained for the week, on the back of crude oil and a weaker dollar.  West Texas crude rose +2% to end the week at $53.20.  Precious metals also gained on the Middle East geopolitical concerns and decline in interest rates; industrial metals, on the other hand, declined.

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.