Economic Update 6-19-2017

• Economic news for the week centered on the Fed, which raised rates another quarter-percent.  Other data included a drop in retail sales and disappointing housing metrics, continued low jobless claims, and strength in a variety of regional manufacturing surveys.
• Equity markets were flattish in the U.S., but declined for the most part abroad.  Bonds fared better, with lower long-term rates despite the Fed’s raising of short-term rates.  Commodities lost ground, with crude oil losing several percent on the week.

U.S. stocks were generally flat for the week on the large-cap side, while small caps declined.  Industrials and utilities led for the week, while technology suffered again while certain high-flying NASDAQ stocks sold off, as did materials.  One of the larger news items was the announced Amazon acquisition of Whole Foods (not a small company in its own right at just under $15 bil. in market cap).  Naturally, Amazon’s entry into any market at this point creates concern for other participants, whether it be apparel retailers and, now, groceries.

Foreign equities underperformed the U.S. in almost every key region, with Japan holding up slightly better and Europe, the U.K. and emerging markets underperforming.  In Japan, the BOJ voted to keep their current stimulus plan in place, with 10-year rates targeted at 0%, along with asset buying.  Sentiment was soured in the U.K. by the first drop in consumer spending in several years, as well as uncertainty surrounding the fallout from recent elections and the impact on Brexit negotiations.  In emerging markets, Chinese stocks declined as policy tightening appeared to have an effect on credit growth (a double-edged sword); Russia suffered as U.S. government issued additional sanctions in addition to a high revenue reliance on oil prices.

Fixed income experienced some mixed performance, with the point of change being the FOMC meeting mid-week.  On net, the U.S. yield curve flattened, with slightly higher rates, coupled with the fed funds move higher on the short-end, and a decline in long-term rates, which appeared to follow in line with the weaker inflation readings.  Bonds fared well from a total return standpoint, with corporate credit outperforming governments slightly in the U.S., with the exception of high yield, which was just up a bit.  The dollar came in slightly weaker, which helped push international developed bonds into positive territory, while emerging market local debt fared far better, with gains of nearly a half-percent for the week.

Real estate experienced an exceptionally strong week with gains of almost +2% in the U.S., and around a percent in Europe and Asia.  Lower interest rates based on the lower inflation readings were a likely catalyst, as this is seen as keeping borrowing costs at bay.

Commodities declined on the week, with negative returns in almost all subsectors, including metals and energy.  Crude oil ended a mixed week down almost -2%, at just under $45/barrel.  Oil has been in this trading range of $45-55/barrel for nearly a year now, following the lows of 2016, and no near-term catalysts appear on the horizon to create any change in this pattern.

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.