Economic Update 9-05-2017

• Economic news for the late summer week was focused on a revision higher in Q2 GDP results, continued expansionary manufacturing numbers, mixed housing results, and a somewhat disappointing employment report.
• Equity markets fared positively for the week, with U.S. stocks outperforming both foreign developed and emerging.  Bonds were flattish with credit outperforming, as did emerging market debt.  Commodities saw positive returns with gains in a variety of categories, with the hurricane impact mostly affecting gasoline prices.

U.S. stocks gained, with small caps coming back to outperform large caps, in fact with the Russell 2000’s weekly return accounting for more than half of its positive gain year-to-date.  By sector, health care bounced back sharply earnings nearly +3%, with positive biotech M&A news, followed by solid returns in technology and materials.  Telecom and utilities lagged with negative returns.

To buck recent trends, foreign stocks underperformed U.S., with mixed results from a stronger U.S. dollar for the week.  Europe gained largely in line with the broader EAFE index, as were net returns in Japan, as a stronger local gain was pared away by a weaker yen.  U.K. results had the opposite effect, due to a stronger pound.  Recently in Europe, a stronger euro has raised a few concerns over earnings results going forward, especially for export-oriented companies.  Emerging markets fared similarly, although country-to-country results were mixed.  China ended the week as one of the leading performers due to several stronger manufacturing surveys.  Mexican shares, among others, reacted negatively in light of U.S. negotiations about the future of NAFTA and legality of a U.S. pullout or restructuring.

U.S. bonds were relatively flat, with minor changes in the yield curve.  However, credit outperformed governments, with gains in high yield.  Emerging market bonds outperformed foreign developed markets, not helped by a minor recovery in the dollar.  One interesting facet of the upcoming debt ceiling/federal budget deadlines is that yields for short-term treasury bills have ‘spiked’ about 0.20% higher for maturities in early-to-mid October—just after the relevant calendar deadline dates, in a reflection of default probabilities.  This has also happened in prior years under similar scenarios, so this phenomenon is nothing new.

Real estate equities gained in all regions, with Asia and Europe outperforming the U.S., in keeping with recent trend.  Domestically, resorts/lodging experienced the strongest week, while retail and residential continued their respective weakness.

Commodities gained, with strength in energy and both industrial and precious metals.  Oil prices were not generally affected by Hurricane Harvey initially, and actually fell later in the week as inventories were larger than anticipated and usage dropped off in the affected part of the country.  West Texas crude dropped by over a dollar during the week but ended back up at $47.29, a net drop of just over 1%.  By contrast, gasoline prices rose over +14% during the week in response—the difference between the two is based on the fact that almost 20% of U.S. refinery capacity is housed on the Gulf Coast.  Gold spot prices are up +15% year-to-date, which coincides with dollar weakness and increased geopolitical uncertainty focused on Korea.

As September begins, as we’ve discussed, the twin issues of funding the government and raising the debt ceiling could dominate both political discussion and market concerns, depending on the severity of the rhetoric.  Interestingly, though, the aftermath of Hurricane Harvey and need for emergency funding for the area may have softened the blow somewhat, according to several analysts, and could expedite legislation that ties disaster aid and FEMA funding to the broader legislation.  At the same time, the Treasury Department and other agencies have reviewed contingency plans for payment delays, if legislation is not ironed out by then.  While a politically-driven government shutdown is a higher probability case than a debt ceiling delay, sadly, a worst-case scenario could again threaten confidence of U.S. government debtholders for no good reason.

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.