Economic Update 7-17-2017

• Economic data for the week was highlighted by a decline in retail sales, consumer sentiment, job openings and year-over-year consumer inflation, while industrial production ticked higher.  Investors were also reassured by Fed Chair Yellen’s comments concerning a continued slow pace of monetary policy tightening.
• Equities in the U.S. and many foreign markets experienced gains for the week, as global sentiment improved in a few areas.  Bond prices rose upon interest rates falling globally.  Commodity indexes rose on the heels of a weaker dollar and rebound in crude oil prices for the week.

U.S. stocks ticked up over a percent for the week, as early-week concerns over the fallout from Trump Jr.’s e-mails were helped later by the dovish tone of the Yellen testimony, as discussed above.  From a sector standpoint, tech stocks experienced the strongest gains, followed by energy as oil prices gained.  Telecom and financial stocks lagged with minor losses for the week, with the latter certainly affected by lower interest rates and the dovish policy outlook.  Earnings reports for Q2 will be ramping up in coming week, which could drive sentiment, barring other macro news.

Developed markets Europe and Japan experienced equity gains in local terms largely similar to those of U.S. stocks; however, a falling dollar on the order of almost a percent for the week to near a 10-month low point acted as a tailwind to push returns even higher in USD-denominated terms.  Emerging markets fared sharply better, with gains of over +4%, led by strength in Brazil and China.  Brazilian stocks were helped by the conviction of former president De Silva (which would physically keep him out of the 2018 presidential race) and the passage of the first labor reform package in over 70 years—both of which are seen as pro-business/anti-leftist developments—as well as early avoidance of corruption charges by the current president Temer.  In Brazil and other emerging market nations, the avoidance of disaster can often be taken as bullishly as constructive events.

U.S. bonds fared well during the week as interest rates declined across the yield curve, along with the policy comments and tempered inflation results for PPI and CPI.  Corporate credit outperformed governments slightly, with strength in high yield as energy prices rebounded.  Foreign bonds experienced gains as well, helped by a weaker dollar.  Local currency denominated emerging market bonds fared especially well during the week, gaining several percent, as spreads contracted.  Canadian interest rates were raised for the first time since 2010, taking the target rate from 0.50% to 0.75%.  This was more significant in terms of signal, as opposed to magnitude, as the economy there, and consequently, monetary policy, tends to be closely tied to that of the U.S.  Similar to Australia, however, prices for oil and other commodities tend to be a larger consideration, as is an extremely robust housing market currently in several key cities that some have referred to as a bubble.

Real estate rose in the U.S., helped by a drop in interest rates and weaker dollar.  Domestically, regional malls/retail recovered by gaining several percent, while apartments were generally flat.  Foreign REITs in Asia and Europe continued their strength with returns stronger than those in the U.S.

Commodities gained several percent on the week, led by the energy group, which rebounded +5%, while precious and industrial metals gained to a lesser degree, and agriculture fell back in contrast to the prior few weeks.  West Texas Intermediate Crude oil moved higher from $44.23 to $46.54/barrel upon reports from the International Energy Agency noting sharper demand growth (China being a key factor) and inventories falling in the U.S. a bit.

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.