Economic Update 7-31-2017

• In a busy week for economic data releases, the Fed meeting resulted in no action and GDP for Q2 came in largely as expected.  Durable goods orders and consumer confidence metrics came in more positively than expected, while a variety of housing data came in weaker than expected.
• Equity markets were generally flattish in the U.S. last week, while foreign equities continued their string of gains, helped at least in small part by a weaker U.S. dollar.  Bonds were mixed but generally lower on the investment-grade side as interest rates rose.  Commodities gained along with sharply higher oil prices to end the week.

U.S. stocks were flattish on the week after an array of mixed economic news, mixed earnings results, the apparent death of the Obamacare repeal effort for the time being, and no action by the FOMC.  In the U.S., large-caps outperformed small-caps, which lost ground.  Sector results were unsurprisingly led by sharp gains in telecom and energy stocks, led by higher oil prices noted below, while health care stocks declined, related to uncertain political news surrounding healthcare reform efforts in Congress and stock-specific losses following poor results for a promising lung cancer treatment.  Tech also took a bit of a breather last week, as did industrials and utilities.

Aside from the usual headline beats and misses, S&P earnings for the most part for Q2 are coming in as expected.  Nearly 60% of index firms have reported so far, and revenue and profit results are continuing to come in stronger than expected at a greater degree than the trailing 5-year average, with overall revenue growth of 5% and EPS growth of just over 9%.

Foreign stocks lagged a bit in local terms with earnings results that were a bit weaker than expected, but were again helped by a dollar that fell by over a half-percent.  Europe led with positive returns, along with emerging markets, while the U.K. was flattish and Japan declined slightly.  Interestingly, as Brexit plans are being discussed, the U.K. pound has already recovered by 8% from lows reached during the height of concerns last year.

U.S. bonds lost ground as interest rates ticked upward at the longer end of the yield curve, although they fell a bit on the shorter end.  With a bit more of a yield cushion, investment-grade credit lost a bit less than treasuries by a few basis points.  High yield, however, earned positive returns for the week in keeping with corporate earnings and higher oil prices, as did bank loans.  International developed market bonds declined in local terms in line with domestic bonds, but experienced a decent week overall with help from a weaker dollar, and outperformed emerging market debt, both USD and local.  Greece re-entered the global bond market for the first time in three years, offering 5-year debt at just over 4.6%, which generally straddles the yield level between developed and emerging markets.

Real estate gained slightly despite higher interest rates, led by lodging and industrial, although mortgage and residential both declined.  International real estate was aided by the weaker dollar.

Commodities gained several percent to end up as the winning asset class for the week.  Energy ended up by far as the leading group once again, with gains in metals and losses in agriculture largely offsetting each other.  West Texas crude oil rose sharply higher, up almost 9% to $49.71, experiencing its best week of the year thus far, upon lower U.S. inventory numbers and promises from Saudi Arabia to cut exports in August in another attempt to boost prices.  There have been struggles with compliance among OPEC members, who, on one hand, are incented to ‘cheat’ by boosting production volume for their own benefit and raising much needed revenue for their depleted coffers, while, on the other hand, withholding supply could boost prices and rendering higher volumes less necessary.  In a sense, it’s become a ‘prisoner’s dilemma’ among oil producing nations.  Considering the low levels of stock and bond market volatility over recent months, oil markets have represented the most excitement of any asset as of late (for those looking for excitement).

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.