Economic Update 5-30-2017

• Economic data last week was led by a weaker durable goods report, an upward revision to first quarter GDP, weakness in housing, and generally neutral results from sentiment and jobless claims.
• Equity markets gained for the week, with U.S. stocks outperforming developed foreign markets, but underperformed emerging markets with a recovery in Brazil.  Bonds were generally flat with little change in yields in the U.S., while emerging market bonds outperformed.  Commodities lost ground following declines in oil prices.

U.S. stocks gained with positive sentiment, with continued decent results but no major economic or company news during the week—as well as a perhaps-welcome lack of any new troublesome news on the political front.  By sector, utilities, technology and consumer staples led with gains over +2%, while energy lagged with losses over -2%, which was related to oil price volatility.

Foreign stocks were mixed, with developed market returns coming in weaker than in the U.S., led by negative returns for Europe and the U.K. in USD terms (although performance was positive in local terms).  Interestingly, some signs of a slow resurgence in Europe have become apparent, such as German business confidence registering its highest-ever level.  While policymakers on the continent continue to push the need for an accommodative monetary policy and growth remains sub-par overall, signs of life have been a positive development for markets—especially when coupled with less-expensive equity valuations.  Emerging markets moved sharply higher on the week, with a recovery in market sentiment in Brazil following a difficult political week.  While such shorter-term events are a common characteristic in these markets and can add to volatility, long-term EM trends favoring growth and policy ‘improvement’ (even if gradual) remain in place.

With minimal change to the yield curve, U.S. bond returns ended up quite flat for the week for both governments and investment-grade corporates.  High yield corporates fared slightly better, as did emerging market debt, particularly as the dollar declined against EM currencies.  In credit news, China’s debt was downgraded from Aa3 to A1 by Moody’s, the first such event for China since 1989, and a minor deterioration in the whole scheme of things, but a reflection of underlying financial strength concerns as well as a trend of slowing economic growth.  At the same time, the degrade was minor, and puts China back down at the same rating as Japan.

Real estate saw slight gains for the week, with far strong returns in Asia and Europe—the opposite pattern compared to broader stock markets.  Mortgage, lodging and industrial experienced gains, while health care fell back.

Commodities declined on the week overall, with negative return in energy and several soft commodities, while precious metals saw gains.  For the week, crude oil ended up down a relatively minor -1.7%, after spiking above $51 upon hopes for extensive production cuts during the week’s OPEC meeting.  However, rather than rising, oil prices fell dramatically later in the week to end at $49.80, presumably due to the length and magnitude of the planned cuts being smaller and of a shorter duration than hoped.  OPEC (as well as non-OPEC) members announced a 9-month extension of their crude oil production cuts, in an effort to stem the global glut.

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.