Economic Update 9-25-2017
- Economic data for the week was highlighted by the outcome of the Fed meeting, which outlined a gradual balance sheet reduction plan. Housing data was mixed, with prices increasing but sales were negatively affected by recent hurricanes. The latter also impacted near-term jobless claims.
- Stock markets rose worldwide, with developed markets outperforming emerging markets, in contrast to recent trend. Bonds returns were generally weak globally, with interest rates ticking higher and the headwind of a stronger U.S. dollar. Commodity indexes gained as oil prices again rose above $50.
U.S. large-cap stocks gained a minor amount, with new record highs being set for the Dow, S&P and NASDAQ, but were outshined by strength in small-caps last week. Aside from economic releases and the Fed meeting conclusion (which was no surprise to markets), a war of words with North Korea and hopes for tax reform remain as key factors underlying recent sentiment. From a sector standpoint, telecom, financials and energy fared best with returns in the +2% range, on the back of clarified Fed policy and oil prices rebounding, while defensive stocks across the board lost several percent, including the utilities and consumer staples groups. Healthcare stocks experienced some volatility earlier in the week as Obamacare repeal/replace legislation was brought up again before fading by the end of the week.
Foreign developed market stocks fared better than large-cap U.S. equities, but gains were tempered by the strength of the U.S. dollar, which gained almost a half-percent on the week. Several manufacturing indexes in Europe pointed to improvement, while inflation rose a bit—an area being closely watched by the ECB as of late, as domestic inflation is by the Fed. German elections were also on the forefront of investors, with Merkel appearing to be the frontrunner through the end the of the week. (Monday morning’s results show her victory to be assured; however, her party did not fare as well as voters leaned to the right, which could create more government policy uncertainty than initially hoped.)
The Bank of Japan again voted for no change in their monetary policy, keeping short term rates slightly negative and 10-year bond rates targeted at 0%. However, additional stimulus measures were announced—in keeping with a string of such activities over the last decade. In this case, more nuanced objectives such as help for education and child care were targeted, with the latter being an indirect strategy to help the increasing integration of women into the workforce to help combat challenging demographics. The Japanese economy continues move at a slow pace, although there have been signs of some expansion and improvement on the corporate governance side on an anecdotal level. However, slow growth from a variety of macro factors continue to weigh on markets there, which are reflected in some valuation metrics.
U.S. bonds lost ground as yields rose across the curve, with credit holding up a bit better than governments, and high yield actually experiencing positive returns on the week. Foreign bonds were negatively impacted by the stronger dollar, which affected emerging markets a bit more than developed.
Real estate also lost ground as the result of higher interest rates, although losses abroad in Asia and Europe were to a lesser degree despite the stronger dollar. Healthcare was hardest hit, which coincided with political discussions surrounding the Obamacare repeal effort.
Commodities gained, bucking the usual headwind of a stronger dollar. The largest sector, energy, was responsible for the bulk of the gains as crude oil moved up to $50.66, ending the week just above the technically-significant $50/barrel threshold—this appeared to be due to demand picking up again following the hurricane-induced trough. Industrial metals also gained, while precious metals and soft commodities fell by several percent.
|Period ending 9/22/2017||1 Week (%)||YTD (%)|
|BlmbgBarcl U.S. Aggregate||-0.15||3.24|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
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.