Economic Update 11-06-2017

• Economic news for the week was dominated by a Fed meeting that resulted in no policy change, mixed manufacturing results, stronger optimism and a below-par employment situation report—several releases continue to demonstrate the effects of recent hurricanes.
• Equities continued their run of success, with gains in the U.S. and foreign markets, on the back of strong earnings and economic growth.  Bonds also fared well as rates decreased.  Commodities gained on the week, in keeping with higher oil demand and lower production.

U.S. stocks ended slightly higher during the week on the large cap side, with the S&P experiencing gains for the eighth week in a row, while small caps suffered declines.  From a sector perspective, technology and energy led the way, with gains approaching +2% for the week, while consumer cyclicals and industrials lagged with declines.  Earnings continue to come in as expected for Q3, in the high single digits overall, led by energy and technology, and the mid-single digits when energy is removed.  Next year’s results are expected to continue to be in the ~+10% range, with pressure on the upside if tax reform is completed.

Market sentiment was held back a bit by indictments by Robert Mueller in the Russian probe, with uncertainty about how far up the chain this could ultimately go.  Other negative contributors included the initial thought that tax reform could be ‘phased in’ over the next several years, as opposed to being implemented immediately.  The release of the initial plan draft alleviated these concerns, while there still appears to be many areas of possible negotiation to come over the next few months.  Speculation at this point probably isn’t overly productive; key elements continue to be a focus on lowing corporate tax rates while not dramatically doing so for high-income households—to keep potential populist anger at bay.  Debate continues and evidence is mixed about the effectiveness of lowering corporate tax rates in promoting trickle-down economic stimulus and job creation, although they would certainly boost company earnings on a bottom-up level.

Foreign stocks in developed regions generally rose, as did emerging markets to a lesser degree.  Economic statistics and earnings continue to improve, which has kept sentiment buoyant in Europe and Japan particularly.  The Bank of England raised interest rates another 0.25% over the week, in an effort to keep inflation at bay, although forward guidance is more tempered about future activity.  Emerging markets ended the week as the highest performing, as strong gains in Asia outweighed weakness in Latin America.

U.S. bonds experienced a solid week as yields drifted lower in longer maturities, while inching higher for shorter issues.  Treasuries outperformed credit, as spreads widened, most sharply noticed in high yield and bank loans, which lost a bit of ground.  Bond yields had also been driven higher by speculation about who the next Fed chair might be, and the selection of Powell—discussed above—seemed to alleviate concerns.  With little change in the dollar for the week, foreign bonds were driven by internal dynamics, and experienced price gains with falling yields abroad.  The exception was emerging markets, where USD-denominated debt came in flat, and local currency bonds declined sharply.

Real estate fared well during the week, with Europe outperforming U.S. issues, which in turn outperformed Asia.  This strength occurred in spite of continued weakness for retail REITs and regional malls, which are in the crosshairs of the internet effect.

Commodities saw gains for the week, as most key segments rose, led by energy and industrial metals.  Oil gained just over +3% as West Texas crude ended at $55.64.  Other than a drop rig counts last week, as measured by Baker Hughes, sentiment continues to be led by the same factors as in prior weeks—which is increasing global demand as economic growth gains steam and uncertainty exists about OPEC production cuts for the coming year.

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.