Economic Update 5-22-2017

• Economic data for the week was highlighted by some mixed regional manufacturing results, stronger industrial production, a drop-off in housing starts, and jobless claims that continue to run at very low historical levels.
• U.S. stocks declined during the week along with more controversy surrounding the president, while foreign equities gained due to the drop in the value of the dollar.  Bonds fared well with investors seeking out safe haven assets, resulting in lower interest rates.  Real estate also gained, as did commodities, with oil prices rising on the heels of extended OPEC supply cuts.

U.S. stocks ended the week lower, despite some recovery by the end of the week.  Markets experienced their sharpest decline in months on Wednesday of roughly -2%, as the specter of rumors surrounding President Trump’s potential intervention in FBI investigations over former national security advisor Flynn and Russia raised questions about impropriety.  More than anything, this thereby soured sentiment surrounding the ability to implement promised legislation—notably tax and healthcare reforms.  From a sector standpoint, defensive staples and utilities unsurprisingly outperformed, with gains, while consumer cyclicals and technology lagged with the largest losses.

The VIX, which had been hovering around its lowest levels in 20 years (below an implied volatility of 10, which is about two-thirds of historical S&P levels), shot back up briefly before settling back at around 12 to close the week.  The VIX has been historically been a gauge of investor fear or complacency at extremes, but the fear spikes have tended to be quick while the periods of complacency have run for longer than expected at times, making correlations to equity movements less than perfect.

Foreign stocks in Japan and Europe also ended up with negative returns, but outperformed domestic equities when adjusted for the U.S. dollar falling -2% versus the broader dollar index.  Emerging markets lagged, as stocks in Brazil were punished by over -8%, as it appeared the new ‘clean’ president was caught up in a potential bribery/corruption scandal, not unlike those that claimed the political careers of his predecessors.  On the positive side, fiscal and structural reforms in Brazil and several other key emerging market nations seem to have taken hold, boding well for future growth and stability, aside from these periodic bumps along the road, which can lead to shorter-term market volatility in affected nations.  Longer-term, however, growth possibilities in such emerging market locations continue to look more compelling than in developed markets, with stronger demographics, consumer demand and integration of companies onto the global stage, but such uncertainty serves to contain investor enthusiasm (and keeps valuations contained as well, which is not a terrible situation for value-seeking investors).

U.S. bonds gained reasonable ground, with flows moving away from equities.  Investment-grade credit outperformed governments slightly, while high yield also returned positively to a lesser degree.  Developed market foreign treasuries gained sharply with a cheaper dollar, while emerging market bonds were generally flat despite spread widening in Brazil, which affected index results.

Real estate experienced gains during the week, contrary to broader equity markets.  Residential REITs outperformed mortgages, while U.S. outperformed international sharply, perhaps due to the tailwind of again lower interest rates.

Commodities gained on the back of energy.  Crude oil rose +6% from just under $48 to $50.70/barrel upon anticipation of OPEC extending supply cuts during their meeting next week.  Then again, we’ve come to expect week-to-week volatility as contracts have been vacillating between the range of $45-55.  Industrial metals and precious metals also gained, the latter due to flows away from equities toward safe haven assets.

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.