Economic Update 1-23-2018

• Economic data for the week was mixed, with decent results reported in industrial production, while regional manufacturing results, housing starts and consumer sentiment came in weaker.  The Fed’s anecdotal Beige Book showed general strength across most segments of the U.S. economy.
• Equity markets in the U.S. rallied for yet another week, with continued strong economic data, despite a more dramatic political backdrop.  Stronger global growth and a weaker dollar propelled foreign stocks to another week of leadership.  Bonds lost ground as interest rates rose for a variety of reasons, while commodities declined along with a pareback in crude oil prices.

U.S. stocks gained for yet another week, with consumer staples and healthcare leading the way, while energy and industrials lagged, with losses.  With a few earnings reports in, earnings continued to surprise on the upside, albeit to a lesser degree than expected; revenues, on the other hand, did surprise on the higher side somewhat.  Interestingly, FactSet lowered their estimates of earnings growth for Q4 due to lower expectations in the financials sectors, while other industries are expected to see growth year-over-year to some degree.

The specter of a government shutdown on Friday (which came to fruition Friday night in time for the weekend) didn’t seem to cast too long of a shadow over markets, which could be getting used to the ongoing political theatre of such debates (there have been over a dozen shutdowns since the 1970’s, with five days being the average duration).  Some economists who evaluate the issue don’t see much of an impact, assuming it’s short-lived.  However, a longer-standing stalemate could begin to weigh on consumer and business confidence and spending, with the potential impact of subtracting 0.2% or so from GDP per week, on an annualized basis.  The drawback in finding a short extension for another month, unfortunately, is that it puts the spending extension in roughly the same time period as the deadline for raising the debt limit.  This offers the potential for more severe market drama, with more at stake.

Foreign stocks performed just below the level of domestic stocks of the week, with similar gains in Europe and Japan, with a weaker dollar pushing returns over the top.  Japanese stocks were helped by PMI readings reaching their highest levels in four years, while corporate sentiment improved in Europe.  Emerging markets fared better, led by Brazil, Mexico and South Africa—which are commodity-oriented nations—as broader economic growth appears stronger.  Chinese growth represented a good part of this, with GDP rising on an annual basis (to +6.8%) for the first time this decade, as trends toward slowing growth have been the norm, and are expected to continue.

U.S. bonds lagged as treasury yields moved higher for the week—both as a byproduct of stronger economic growth but also technical asset flows out of U.S. markets on the week due to political uncertainty surrounding the magnitude of the government shutdown.  High yield credit fared better, with minimal losses, while floating rate bank loans gained.  Foreign bonds in both developed and emerging markets rose slightly in local terms as yields declined, but were helped more significantly by a weaker dollar.

Commodities lost ground for the week, with prices declining in all key groups.  Energy led the way, as crude oil fell back by $1/barrel to end the week at $63.31.  The key catalyst was a report from the U.S. Energy Information Administration, which predicted that higher shale activity would cause domestic production to rise above 10 million barrels/day—not seen since the early 1970’s.

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.