Economic Update 1-08-2018

• Economic data for the first week of the new year showed strength in manufacturing, a weaker result for services ISM, and a mixed result in employment, with strong jobless claims and ADP employment numbers, while the government employment report disappointed with challenging winter weather.

• Equity markets started the year with significant gains globally, with optimism for the new year running high in both the U.S. and abroad.  Bonds faced a more challenging week, as interest rates increased along with these expectations.  Commodities rose to a more tempered degree, as crude oil again gained in price.

U.S. stocks gained across the board sharply for the first week in 2018.  The Dow Jones Industrial Average reached another round number, the 25,000 level, which naturally raises attention to the higher levels of the index and propelling investor momentum.  From a sector standpoint, cyclical tech and materials led the way, while defensive utilities lost ground as interest rates rose.  Interestingly, the VIX volatility index also reached a new record low during the week.  It would not be surprising to see this tick back upward with deadlines on the budget and debt ceiling forthcoming over the next few weeks.

Foreign stocks rose broadly to the same or stronger degree as U.S. equities, with some help from a moderately weaker dollar.  Japan and emerging markets fared best, followed by Europe, and the U.K., where gains were modest.  Sentiment in Europe and Japan has been helped, as in the U.S., by stronger economic results and possible winddown of economic stimulus this coming year, while recent success of commodities markets has boosted equity markets for key BRIC members Russia and Brazil.  China has also performed well as of late, as manufacturing and services indexes have shown gains, which has kept sentiment strong in spite of government promises to pull the reins in on credit.

U.S. bonds declined for the week across the investment-grade side as interest rates ticked higher, led by weakness in the longest-term treasuries.  High yield corporates and floating rate bank loans, on the other hand, ended up with positive returns.  Foreign developed market bonds were flattish for the week, while emerging market debt gained sharply, in keeping with trends in other pro-risk assets.

Real estate in the U.S. declined for the week, in keeping with higher interest rates, while foreign REITs continued their string of gains, particularly in the Asian region.

Commodities were up slightly for the week, in about the same magnitude of the drop in the dollar.  Precious metals fared best, with gains near a percent, followed by energy.  For the energy sector, crude oil rose another dollar to close the week at $61.44, while natural gas fell -5% as weather normalized somewhat around the nation.  Declines in the price of copper led industrial metals to negative returns for the week.

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.