Economic Update 3-26-2018

• Economic data for the week included an increase in the short-term interest rate by the Federal Reserve, as well as stronger durable goods orders and leading indicator results.  Housing and jobless claims results were mixed to some degree.
• Global equity markets declined due to a variety of negative inputs, including fears of a widespread deterioration in global trade conditions.  This pulled the dollar down by nearly a percent, helping temper losses for foreign stocks.  Bonds ended the week slightly higher, as interest rates tempered a bit, with foreign outpacing U.S.  Commodities gain on the heels of a sharp move higher in the price of crude oil.

U.S. stocks experienced another bout of negative volatility with several events conspiring to pull down investor sentiment.  Early in the week, the tech sector took a hit especially, with FANG component Facebook falling over -10% after concern over data from 50 million users was gathered inappropriately by a third party firm for political purposes.  The firm was slow to address the incident and any changes in policy, while some observers were calling for a boycott.  The FOMC meeting offered no surprises in policy, but tone of new Chair Powell—noting heightened sensitivity to inflation (nothing new)—was being more carefully scrutinized for how the new regime may differ from the Yellen Fed.  Congressional leaders (and finally the President) agreed on stopgap measure to avoid a government shutdown until at least Sept., although this was not in the news as much as prior bills of this type.

The key catalyst for market worry appeared to be trade war talk to combat China’s ‘aggression’.  The administration authorized tariffs on at least $50 billion worth of imported Chinese goods, with comments of ‘more to come’ pushing market sentiment sharply lower.  The key uncertainty was how China will respond, after mentioning similar rhetoric and tariffs targeting U.S. exports.  Another wrinkle was the turnover of several White House staff (again), including the National Security Advisor and President’s personal attorney.  As we’ve noted before, uncertainty and open-ended negative possibilities are inputs that markets can’t stand—with a resulting -5% decline.

From a sector standpoint, energy fared best, with minimal losses under -1% and buoyed by higher oil prices, while technology and financials suffered the most, down over -7%.

Foreign stocks fared better than U.S. equities in local terms, but especially after considering a -1% drop in the dollar.  Emerging markets fared better, with lesser dollar impact, but only a loss of just over -1% for the week.  European stock sentiment was largely driven by U.S. tariff talk, although several exemptions were already given to key industries.  This problem of potential impact on global growth could become a self-fulfilling prophecy if a stronger euro negatively pressures European exports.  PMI numbers also fell off a bit in Europe, causing some to question the current sustainability of growth.  Emerging markets were mixed, with more volatile returns in nations potentially affected by U.S.-China trade tariffs but strength in markets benefitting from higher oil/commodity prices as of late.

U.S. bonds gained a bit during the flight away from equities, as interest rates across the yield curve ticked down.  However, the fact that the decline was not more pronounced is perhaps a testament to a new higher bar for yields, as a reflection of stronger economic growth.  Government bonds outperformed investment-grade corporates, as spreads widened.  Foreign bonds in developed markets experienced slightly better gains, while a significantly weaker dollar elevated index gains to well over a percent for the week.  Emerging market bonds gained slightly, with lesser USD effects.

Real estate returns were negative across the board in the U.S., but were sector-dependent and lost ground to a lesser degree than broader equity markets.  Mortgage REITs suffered less with lower interest rates, and non-U.S. real estate indexes were aided by a weaker dollar.  Cyclically-sensitive office/industrial and lodging suffered the most dramatic losses for the week, as expected.  Year-to-date, real estate remains one of the more pressured asset classes, due to expectations for higher interest rates, still-tempered inflation as well as additional supply picking up in a few key office markets.

Commodities generally gained a few percent on the week.  Energy rose +5% on the heels of oil, while natural gas lost ground.  West Texas crude oil prices marched steadily higher during the week to end at $65.88, nearing highs from late January.  The impetus was a weaker dollar, concerns over a more hawkish U.S. foreign policy with the administration’s change in the National Security Advisor, as well as Saudi comments that OPEC production cuts could be extended into 2019.  Industrial metals lost a few percent, along with broader paring back of risk in global equity markets, which helped precious metals returns gain a few percent.

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.