Economic Update 10-02-2017

• Economic news for the week included generally few surprises—a small revision upward for prior-quarter GDP, strong manufacturing results, mixed but generally disappointing housing data, slightly weaker sentiment and weather-affected jobless claims.
• S. equity markets rose, led by small-cap stocks, while foreign markets were mixed, being negatively affected by a stronger U.S. dollar.  Bonds lost ground on the government side with higher rates, while credit fared better.  Commodities were mixed, as a pullback in metals was matched by higher pricing for crude oil.

U.S. stocks gained for the week, with small-caps again outperforming large-caps by a wide margin.  The tax reform announcement mid-week was taken positively by the market, although the realization that it could take time to iron out brought sentiment back down to earth a bit by Friday.  From a sector standpoint, energy and technology led the way—the former by further gains in the price of crude oil and the latter by strength in semis—while consumer staples ended flat and utilities were the only losing group for the week.

Interestingly, it was announced that a new ‘FANG+’ futures index will begin trading in November, which is focused on the popular group of stocks in the new age technology space.  As we have often seen, new industry product launches can often coincide with peak popularity of a particular group (and, unfortunately, when forward-looking return potential begins to look less promising).

Foreign stocks in developed markets were up near or over the 1% mark in Japan, Europe and U.K. in local currency terms, but the negative influence of a stronger dollar—which gained 1% for the week—brought these back to just slightly positive on net.  Returns largely tracked those in the U.S., other than relief over the results of the recent German elections, and some positive economic sentiment in Europe generally.  The Japanese central bank has discussed continuing to buy an unlimited amount of government bonds to keep yields near zero—which is a continuation of current policy and in contrast to the U.S. removal of stimulus and somewhat to Europe, where stimulus is relative based on conditions.  At this point, worldwide divergence is beginning to occur in earnest.  Emerging markets stocks experienced negative returns on the week, as most of the BRICs lost ground, except for Russia, that gained due to a further recovery in oil.

U.S. bonds lost some ground as interest rates ticked higher—seemingly due to hopes that eventual tax reform will result in higher growth and a faster-acting Fed, and, perhaps more importantly, growth of the Federal deficit and new treasury supply.  Due to the higher coupon buffer, investment-grade credit outperformed governments, albeit just ending flattish, with high yield faring a bit better.  Foreign developed market bonds fared similarly to U.S. debt in local currency terms, but lost about a percent more as the dollar strengthened for the week.  Similarly, USD-denominated emerging market bonds were flat, while EM local currency debt fared worse, losing nearly -2%.

Real estate returns in the U.S. were mixed, with positive results in the U.S., led by strength in the more cyclical lodging sector.  Foreign REITs were negatively affected by a stronger dollar, and lagged.

Commodity indexes ended slightly higher for the week, despite the stronger dollar, which is usually inversely correlated.  Gains in energy were offset by weakness in agriculture (mostly tropical softs again) and industrial and precious metals—the latter due to a push toward risk assets.  Crude oil rose +2% to end the week at $51.67.

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.