Economic Update 12-27-2017

Economic releases last week consisted of very strong results in housing and manufacturing, as well as the broad measure of leading economic indicators, mixed results from personal income/spending and durable goods orders and slightly worse sentiment and jobless claims.

U.S. equities gained with tax reform efforts wrapping up, which boosted pre-Holiday sentiment.  Foreign equities outperformed with help from a weaker dollar.  Bonds generally lost ground as interest rates gained across the curve.  Commodities also rose slightly, along with the price of crude oil.

U.S. stocks gained on the week as tax reform made its final strides through the legislative process, slated to take effect Jan. 1, although most volume occurred earlier in the week.  From a sector standpoint, energy experienced sharp gains in keeping with higher prices for crude oil.  Utilities lagged with negative returns on the week, with higher interest rates and perhaps various aspects of the new tax bill which do not favor the utilities sector.  Interestingly, a sharp drop in the price of Bitcoin over the past week, nearing a third of its value, did not appear to carry over to other financial markets.

Foreign stocks generally fared better than U.S. equities, with help from a weaker dollar.  Emerging markets fared best, with gains in energy and commodities, followed by U.K. and Europe.  Sentiment generally followed tax reform in the U.S., but was otherwise tempered due to the low volume pre-holiday week.  The exception was in Spain, which lost ground after elections in Catalonia saw separatists fared well.  The Bank of Japan elected to keep interest rates unchanged, which is slightly negative rates on the short end and 10-year rates at zero, although assessments of economic growth there have improved.

U.S. bonds fared poorly as interest rates rose along the yield curve—as the passed tax reform act is expected to improve economic growth and keep the Fed’s pace of rate increases intact and/or accelerate them ultimately, as well as pick up inflation pressures.  The yield on the bellwether 10-year treasury reached 2.5%, which is the highest level since March.  With a slightly larger yield advantage, credit fared a bit better than government bonds, with high yield and bank loans ending the week with positive returns.  Foreign developed bonds were little changed during the week, while local currency emerging market bonds led all regions.

Real estate was mixed, with international REITs gaining with help from a weaker dollar, while U.S. REITs declined for the week, as interest rates rose along with prospects for economic growth due to a passed tax cut.

Commodities generally gained on net for the week, with positive returns for energy, industrial and precious metals.  Crude oil gained +2% to end the week at $58.47.

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.