Economic Update 5-15-2017

• Economic data for the week was highlighted by a disappointing gain in retail sales, while consumer sentiment improved, jobless claims provided their best showing in almost 30 years, while inflation numbers were mixed but generally showed tempered gains.
• U.S. equity markets lost ground, while foreign markets experienced a positive week.  Bonds were up slightly with rates ticking downward, and commodity indexes rose due to an increase in energy prices.

U.S. stocks declined on the week on net with mixed economic data and decent earnings reports generally were coupled with the surprise firing of FBI Director Comey along with poor results from several retailers, including Macy’s, Sears and J.C. Penney.  Earnings results for the prior quarter for the broader S&P overall, however, have continued to come in positive.  By sector, technology and energy both performed positively, while materials and financials lagged by the greatest degree during the week.

Foreign stocks outperformed U.S. equities on average, with strength in the U.K. with the central bank keeping rates unchanged but taking on a more hawkish tone, while Europe gained a bit in local terms but performed negatively in USD terms—most of the French election excitement had already played out the prior week before the election actually happened.  Regardless, interest is now moving to parliamentary elections and other nations as the core concerns about the EU have been alleviated for now.  Investor flow and interest are also moving toward European equities, due to lower valuations (which have been the case for a while now), but more immediately due to better relative performance versus domestic equities—this is often what it takes for investor sentiment to turn.  Emerging markets gained the most ground, with Brazil and China were big winners for the week.  In Brazil’s case, the inflation fell to its lowest level in a decade, implying further rate cuts could be appropriate.  For China, a rise in foreign exchange reserves buoyed sentiment.

U.S. bonds ended in the positive for the week with rates declining somewhat and flows moving away from stocks modestly.  U.S. high yield and investment-grade credit were the best-performing groups, by only by a fraction of a percent.  A stronger dollar acted as a headwind to developed market foreign bonds, which generally fell back by the amount of the currency differential; however, emerging market bonds fared well on the week with less of a dollar impact.

Real estate declined on the week in the U.S., while European REITs experienced positive gains.  Domestically, healthcare was the best-performing group, while lodging/resorts and retail/malls declined substantially—the latter based on poor retailing earnings results.

Commodity indexes generally experienced gains during the week, led by a rebound in energy prices.  West Texas crude moved up +3.5% to $47.84 by Friday on some signs that domestic stockpiles were drawing down a bit, as well as possibly stronger than expected compliance with OPEC production cuts abroad.  Of course, these remain week-to-week news events, especially as meetings are schedule in the next few weeks to potentially extend the OPEC agreement further.  Precious metals were slightly higher on the week, and mirrored by industrial metals falling slightly.

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.