Economic Update 5-8-2017
- Economic data for the week was highlighted by a decline in but still-strong ISM manufacturing numbers, continued strength in ISM non-manufacturing, and continued strength in labor metrics, including the April employment situation report. The FOMC meeting resulted in no policy action, which was as expected, although chances for a June rate increase appear to have again risen.
- Equity markets rose over the week, with foreign stocks in Europe especially strong with sentiment improving prior to the French election. Bonds pulled back a bit in the U.S., as rates rose, while foreign bonds benefitted a bit from a weaker dollar. Commodities generally lost ground due to continued weakness in crude oil prices.
U.S. stocks gained in a week highlighted by a federal government funding bill and initial press with a replacement healthcare reform bill—which has, although early in the process, provided a sentiment boost to those hoping tax reform will also come together with better legislative cooperation. The final polling results for the French election favoring Macron (who won Sunday) also played a part in global sentiment as the chances for a EU breakup declined dramatically, and chances for modern, market-friendly reforms increased.
First quarter earnings have been rolling in, with nearly two-thirds of S&P 500 companies having reported. According to FactSet, earnings growth has registered in the ~13% range year-over-year for Q1—the third consecutive quarter of positive growth and the highest rate since Q3 2011. The energy sector led the way, but even with this sector removed, the index produced earnings growth of over +9%. In fact, the vast majority of firms have beaten expectations by a fair amount. A weaker dollar for the quarter was one catalyst, but better global conditions have been a more notable trend. For the full 2017 year, estimates remain in the range of +10%, with revenue growth of just over +5%.
Foreign stocks fared better than those in the U.S., with especially strong returns in Europe, although the U.K. and Japan fared decently as well. Emerging markets offered positive returns, but lagged all other key areas for the week. European equities were helped by stronger economic data, better earnings numbers as well as sentiment settling down with French election results favoring Macron. Greece also completed an agreement with creditors to receive the next installment of their bailout program.
While some of the concerns over an off-the-wall outcome had dissipated over the past few weeks, these weren’t put to bed until the 2nd/final round of the French presidential election yesterday. While the extreme outcome of a populist LePen has been put to bed, there does appear to be support for structural reforms in labor markets, reduction of an over-burdensome regulatory environment, a large welfare system and elsewhere to streamline and modernize the economy, in addition to bringing down deficits and overall debt levels. France is a bit of an enigma, in that it shares some of the stronger tie-in with global trade with Germany (although to a much lesser degree) and is the home of a variety of world-leading firms; however, it also features some of the inefficiencies of the periphery, like Spain and Italy (but also to a much lesser degree), such as higher labor costs and rigidity with hiring/firing workers. However, it appears the majority of the French prefer to stay in the European Union, which lowers the chances of a ‘Frexit’ vote anytime soon.
U.S. bonds fell back as interest rates ticked upward across the yield curve. Governments, investment-grade corporates and high yield all generally fared within a few basis points of each other. A slightly weaker dollar helped the USD returns for both developed market and emerging market debt.
Real estate lost ground a bit in the U.S. as rates ticked higher; however, Europe fared significantly better, along with broader equities.
Commodities generally declined on the week, led by the energy group. West Texas crude oil prices fell about -7% to the $46.20 area; pricing has been pressured by not only high supplies as we’ve noted several times but also commentary from well-known analysts (such as those at Goldman) that have noted continued price pressure downward if these conditions persist. This is mostly due to OPEC production cuts (which are set to expire soon) being offset by rising U.S. production. How this plays out is the ongoing significant wildcard in the energy space. Precious and industrial metals also declined, which detracted from overall index returns.
|Period ending 5/5/2017||1 Week (%)||YTD (%)|
|BlmbgBarcl U.S. Aggregate||-0.23||1.36|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
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 offe