Economic Update 11-13-2017

• In a very light week for economic data, highlights included continued strong job openings data, while claims ticked upward due to temporary weather impacts.  Consumer sentiment also ticked downward a bit.
• U.S. and foreign equity markets lost ground for the first week in several as sentiment soured, although emerging markets gained.  Bonds were also down across the board, although a weaker dollar helped foreign stocks and bonds somewhat.  Commodities gained as energy prices again moved higher.

U.S. stocks lost a bit of ground for the week, due to a few lackluster earnings reports, but mostly due to weakened hopes for tax reform prior to 2019, as Congressional negotiations continue.  From a sector standpoint, defensive consumer staples led the way, followed by energy due to oil price gains, while financials lost several percent.

Foreign stocks were mixed, with local returns translating to stronger USD returns due to a weaker dollar overall.  Aside from internal economic conditions, a good deal of sentiment was driven by prospects for U.S. tax reform, which has an impact on corporate competitiveness for overseas firms.  Japanese stocks led with gains, while Europe and the U.K. lost ground in similar fashion to domestic stocks.  European earnings reports have leveled off somewhat, particularly with the number of earnings surprises declining relative to prior quarters; to the contrary, results for Japanese stocks have continued to improve, in keeping with multi-year highs in PMI data.  It’s interesting to note that growth expectations for both remain higher than for that in the U.S., which is an important buoy for sentiment and valuations.  Emerging markets experienced the strongest gains of any equity segment, led by positive market response in China, which experienced strong export growth reports in addition to the opening of the financial sector—allowing increasingly larger levels of foreign ownership, reiterating the government’s promises to ramp up reforms.  Russian stocks also fared well with higher crude oil prices as of late.

U.S. bonds generally lost ground as interest rates ticked slightly higher.  Government debt outperformed credit for the most part as spreads widened, with high yield bonds losing the most ground, other than ultra-long duration treasuries.  Foreign bonds in both developed and emerging markets lost slightly in local terms, but were helped by a weaker U.S. dollar, which pushed several areas into positive territory.  Interesting, municipal bond markets have experienced higher uncertainty in recent weeks as proposed tax reforms could affect a number of bond segments—potentially reducing the number of bonds that qualify for tax-exempt status.  This carries over to market supply/demand dynamics as well as the ability for jurisdictions/projects to obtain financing at the most attractive rates.  These look to continue to be in flux until tax reform details are hashed out, but this market represents an important side effect of tax decisions.

Real estate bucked the trend of weaker equities and higher interest rates by gaining in the U.S., Europe and Asia.  Domestically, much maligned retail/regional malls bounced back sharply, followed by residential, while mortgage REITs fell back.

Commodity indexes generally gained for the week, as stronger prices for energy and precious metals offset declines in industrial metals.  Crude oil gained just over +2% to end the week at $56.74, as the arrests of Saudi officials on corruption charges the prior weekend again pushed prices higher, while the addition of the most U.S. drilling rigs since June caused prices to pull back a bit by later in the week.  Natural gas spot gained +10%, as a stretch of poor sentiment and a warmer-than-expected winter reversed somewhat.

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.