Economic Update 7-24-2017

• Economic data for the week was mixed, with several regional manufacturing surveys showing weaker yet still expanding metrics, but strong housing starts and monthly index of broad leading indicators.
• Equity markets gained globally, with emerging markets outperforming developed markets.  Bonds also fared well, with interest rates declining worldwide amidst dovish central bank language and weaker inflation.  Commodity indexes fell overall as oil prices declined a bit for the week, offset partially by a rise in gold.

U.S. stocks generally rose on the week, with an absence of global macro news but benign corporate earnings reports, and several indexes reaching all-time highs again.  By sector, utilities was the surprising winner, helped by lower interest rates, followed by tech and health care; industrials and energy lagged with negative results for the week.

Earnings for Q2 have begun stacking up in earnest, with results for almost 20% of the S&P having reported.  Three-quarters of these reports have beaten the mean estimate on both an earnings and revenue basis (per FactSet); however, as per tradition, these include lowered expectations, especially from the energy sector, while expectations for financials have improved in recent months.  Overall, the S&P earnings growth rate is right around 7% (8% overall, and 6% excluding the large bounceback experienced by the energy sector), and 12-month forward P/E stands at 17.8x, which is above the long-term average range of 15-16x.  It is still relatively early in earnings season, so these early figures are likely to evolve, but full-year 2017 earnings growth is expected to be in the 8-10% range (based on who’s doing the estimating), with slightly better results for 2018.

The dollar declined another percent, which helped the cause of foreign stocks, especially Japan upon a stronger yen, while the U.K. slightly positive and Eurozone local losses turned into a flat result upon a stronger euro.  Early earnings trends abroad were generally a bit weaker than expected in Europe, but stronger in the U.K.

The ECB meeting concluded, with no action taken, but the commentary was more dovish than some expected and tempering sentiment from prior weeks a bit—noting, similar to the U.S. FOMC, that financial conditions tightening too quickly could slow down or jeopardize the recovery process.  There’s nothing especially poignant or original about that statement, but the mere comment gives markets an important message about central bank awareness and priorities

Emerging markets gained just over a percent, leading the global group.  Chinese stocks experienced decent gains, as Q2 GDP game in a tenth better than expected at +6.9%, as well as strong industrial production and retail sales numbers that are showing a bit of a rebound in the region.  This has occurred despite the efforts of Chinese officials to tighten policy in order to wring out excesses in internal debt levels, especially in state-owned enterprises, which has boosted sentiment once again.  At this rate, China could see the first acceleration higher in economic growth in seven years.  The ongoing ‘bottoming’ of results in EM has certainly aided the strong advance of that segment year-to-date, leading all others.  In another example, S&P raised their rating outlook on Mexico to ‘stable’, with the overall rating maintained at BBB+; the peso is up +20% as Trump-induced trade war fears have dissipated, while reforms and growth conditions have continued to improve.

U.S. bonds gained as interest rates declined across the curve.  Investment-grade credit slightly outperformed governments, both of which outperformed high yield, which escaped with minimal gains on the week—affected by weaker energy results.  Developed market foreign bonds fared well due to a weaker dollar, weaker inflation trends and dovish ECB commentary, gaining several percent for the week.  Emerging market bond results were largely in line with U.S. debt with lessened sensitivity to the dollar effect on net.

Real estate fared well, in line with equities, also seemingly helped by lower interest rates.  Residential REITs generally outperformed mortgage REITs.  This is despite the latter performing well in falling rate periods; however, mREITs have been on a tear for the past year and appear to be suffering from a bit of profit-taking.

Commodity indexes lost ground in keeping with a weaker energy sector, although gold jumped by over +2%, helped by lower bond yields.  West Texas crude fell just under a dollar, about -1.5%, to $45.77 to end the week.

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.