Economic Update 10-09-2017

• Economic data for the week was led by especially strong ISM manufacturing and non-manufacturing reports, decent construction spending, while the employment situation report for September was a mixed bag of
• U.S. stock markets continued to churn forward, while a stronger dollar held back developed foreign markets—with the exception of emerging markets, which outperformed all groups.  Bond returns were tempered, as U.S. rates rose a bit.  Commodities lagged due to a drop in the price of crude oil and natural gas.

U.S. stocks rose, with the S&P hitting several new highs yet again over the course of the week.  Large-cap and small-cap stocks performed within a fraction of a percent of each other.  From a sector perspective, materials and financials led the way, with gains nearing +2%, while losing sectors were energy and consumer staples.  Amazingly, the S&P has now gone 500 days without a significant -10% correction.  Small caps performed in line with large caps for the week, with the recent stronger performance of small companies likely linked to improved sentiment in the area of tax reform, which could stand to benefit small firms more directly.

Foreign stocks in developed markets were held back by a stronger dollar, which took gains in local currency terms for Europe and the U.K. back down to flat for U.S. investors, while Japanese markets retained their gains.  Spanish markets have continued to experience volatility, and losses last week, as the independence referendum in Catalonia (home of Barcelona, representing almost a quarter of their national economy) has shaken investor confidence.  However, an extreme outcome, which would be defined as Catalonia breaking off from the rest of Spain, appears less likely at this time, as the movement has little international support—however, a prolonged period of uncertainty could continue to weigh on the Spanish economy.  On the positive side, PMI results in Europe have reached high levels very near those registered in the U.S.  Emerging market gains, however, surpassed all other regions for the week, with gains by the majority of BRIC nations, with strong Chinese manufacturing results; the exception was Russia, which lagged along with oil.

U.S. bonds fell back a bit, as yields rose across the yield curve slightly with stronger economic growth and rising consensus of a Fed hike in December, notably after rising wage growth noted on Friday.  Bank loans ended the week in the positive, however, with high yield flat, and investment-grade credit slightly negative—outperforming treasuries.  Foreign developed market bonds were held back by a stronger U.S. dollar, resulting in sharp losses, while emerging market debt suffered to a far lesser degree, with local and USD debt performing similarly.

Real estate in the U.S. gained, despite higher interest rates, and outperformed European REITs but underperformed strong gains from Asian REITs.

Commodities fell back during the week, led by declines in energy.  Agriculture and precious metals fell back slightly on net, while industrial metals gained to continue their winning streak as of late.  Crude oil fell back to earth last week, declining nearly -5% to $49.29 by Friday.  Despite a new tropical storm reaching the gulf states and meetings between Russia and Saudi Arabia, in some part intended to limit oil production further to lift prices and bolster the government balance sheet for each, higher U.S. production numbers showing their highest levels in two years outweighed the other factors.

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.