Economic Update 6-05-2017

• Economic data for the week was generally flat to a bit weaker, with decent results from manufacturing surveys, continued mixed housing data, and a poorer-than-expected May employment situation report.
• Equity markets gained both in the U.S. and overseas, as did bonds, with a decline in interest rates and falling dollar, which benefitted foreign securities.  Commodities declined along with crude oil due to high inventories and an increase in anticipated drilling activity.

In a Memorial Day-shortened week, U.S. large cap stocks rose about a percent, with a stronger recovery from small-caps, which have lagged over the last several weeks, while overall volumes remained low for a pre-summer week.  In fact, the DJIA, S&P 500 and Nasdaq all reached new highs again.  For the week, health care and telecom ended up with the biggest gains, while energy stocks fell over -2% along with another decline in oil prices.  Per FactSet, 99% of S&P companies have now reported their 1^st quarter earnings, at a combined growth rate of +14% year-over-year (a rate that has been ticking slowly higher as numbers have been coming in), which is the highest since the 3^rd quarter of 2011, and quite a bit better than the +9% predicted at the beginning of the reporting season in March.

Developed market foreign stocks outperformed U.S., with stronger gains in both Japan and Europe.  Europe has continued to experience a general improvement in sentiment, with very strong results year-to-date and ten straight weeks of investor inflows (which tend to follow performance).  Japanese data was mixed, but signs emerged of some improvement in corporate results and PMI indexes.  Emerging market stocks ended the week relatively flat, with results generally along the lines of developed markets except for Brazil and Russia, which lost significant ground, despite the former ending up with the first positive real GDP result in two years.

U.S. bonds fared well on the week, with a decline in bond yields across the curve, largely as a result of the disappointing jobs report on Friday.  Credit outperformed governments, although investment-grade provided higher returns than high yield corporates.  Foreign bonds fared well generally due to a falling dollar over the week of nearly a percent.

Real estate generally saw gains, with international REITs in Europe and Asia sharply outperforming those in the U.S., and helped by a weaker dollar.  Domestically, industrial/office, residential and healthcare experienced strong gains on the order of +2%, while retail REITs suffered again.

Commodities declined again, led by weakness in crude oil, which fell over -4% to under $48/barrel.  Last week, it was the Trump decision to withdraw from the Paris Climate Accord that buoyed hopes and fears of ramped-up U.S. oil drilling, which could exacerbate the already-existing oil inventory glut.  Natural gas also lost nearly -10%.  Industrial metals also lost some ground, while precious metals gained on the week with lower bond yields, bringing the gains in 2017 for the latter to +10%.  Sugar prices declined sharply, due to fears of a continued surplus and lagging demand—the commodity is down -30% year-to-date already.

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.