Economic Update 8-15-2017

• Economic data was highlighted by weakness in inflation, with the PPI and CPI both coming in lower than expected.  On the labor side, the government JOLTs job openings index and claims continued to show strength, while labor cost and productivity growth remained sub-par.
• Global equity markets fell last week, in line with most risk assets, due to escalating geopolitical tensions with North Korea.  Government bonds, by contrast, in both the U.S. and developed foreign markets fared well that that safe haven-seeking environment, and outperformed corporates and emerging markets.  Commodities lost a bit of ground on net as oil prices fell.

U.S. stocks declined over a percent on the week for the first time in a while, ruining an otherwise benign summer week, as concerns over North Korea, notably the comment about ‘fire and fury’, outshined a lack of significant other economic or financial news, other than a few disappointing earnings reports in the consumer sector.  Small caps were punished far worse than large-caps, in a continuing pattern of underperformance from that group.

Insofar as sectors were concerned, energy suffered the most extensive losses, down over -2.5% on the week, followed by materials, with the former being additionally affected by a drop in oil prices.  Consumer staples bucked the trend with a minor gain for the week, while utilities were almost flat.

Foreign stocks fared a bit worse than U.S. equities in local terms, but a weaker dollar helped offset some of the effect.  Japan fared better than both Europe and the emerging markets; Korean stocks lost about -5% percent to no surprise.  Interestingly, several former Japanese central bankers opined that the BOJ may need to alter or slow down the pace of bond and other security purchases (like ETFs) due to a possible shortage of assets to buy—and inflation levels of 1-2% still look to be a challenge.

U.S. bonds experienced a strong week, with a pullback in risk asset prices due to the geopolitical North Korean conflict.  Weaker inflation to end the week certainly didn’t help interest rates stay afloat, which led to lessened probabilities of FOMC interest rate action later in the year.  Treasuries earned most of the benefits for the week, while investment-grade corporates came in flat and high yield lost ground.  Foreign bonds in developed markets gained due to the same tendencies, with a weaker dollar on the order of about a half-percent acted as a tailwind to boost returns higher than U.S. treasuries.  Emerging market bonds all generally lost ground.

Real estate lost ground globally, in keeping with broader equity markets, with Asia and Europe outperforming the U.S.  Domestically, both lodging/resorts and retail suffered sharp losses, with the latter continuing to be affected by weakness in the equity consumer retail sector.

Commodity indexes also fell, but to a lesser degree than equities.  Crude oil fell -1.5% to $48.82/barrel due to reports of higher global oil production for several months in a row, which brought down the energy segment.  On the other hand, industrial metals and precious metals both gained sharply (gold due to the geopolitical Korea risks, as would be expected).

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.