Economic Update 4-02-2018

• On a holiday-shortened week, home sales and price data came in solidly, as did jobless claims; manufacturing data came in expansionary but at a slower pace, while consumer sentiment declined a bit.
• Equity markets recovered globally last week, as rhetoric over a trade war with China dissipated a bit.  U.S. bonds fared well, with interest rates falling back from recent high levels.  Commodities fell a bit on the week, led by declines in the prices of crude oil and gold.

U.S. stocks gained ground on a week shortened by the Good Friday holiday.  Volatility was present again early in the week as a relief rally on Monday due to a tempering in tariff language that shook markets sharply last week, while mid-week sentiment was challenged again as Facebook struggled to explain its data lapses—bringing down the high-flying tech sector.    Overall, a tempering of fears surrounding a trade war with China appeared to boost sentiment for risk assets overall, although trade war talk and actions on both sides continue to be a theme of potential uncertainty over coming weeks.  It’s not the dollar amounts of various targeted items that is making investor jittery—it’s the fears of possible escalation to more substantive trade policy matters that could dampen the global economic recovery or grind it to a halt.  The latter result does not appear to be the base case, in the current view of many economists, due to the basic fact that no one really wins under such an outcome.

Defensive consumer staples led the way with the strongest gains of over 3%, followed by telecom and utilities, while energy and consumer discretionary stocks gained just over a percent.  Large index component Amazon was also hit with tough talk from the administration, hinting at anti-trust concerns.

Foreign stocks in Europe, U.K. and Japan all gained, albeit to a lesser degree than domestic stocks, brought down further to minimal levels by a stronger dollar.  With a lack of major news releases, it appears sentiment abroad was also driven by lessened concerns over a broader global trade war, as it was in the U.S.  Emerging market stocks lost ground slightly during the week, although results by region were mixed.

U.S. bonds benefitted from the shift in cash flows back to equities, with most segments showing gains along with interest rates falling to their lowest levels in a nearly two months.  Investment-grade corporates outperformed governments, although high yield bonds ended up with minimal gains for the week and bank loans ended flat.  The dollar rose by nearly 1%, turning minor gains in developed market foreign bonds into losses when translated into USD terms, with the key 10-year rate in Germany falling below 0.50% again.  Emerging market bonds generally retained decent gains, with less of a currency effect, in keeping with positive sentiment for risk assets generally.

Real estate recovered well with a drop in interest rates, which had been weighing on sentiment, with U.S. REITs sharply outperforming foreign issues that were weighed down by a stronger dollar.  All segments gained, but were led by +5% increases in residential and cyclically-sensitive lodging/resorts.

Commodity indexes declined slightly, led by weaker returns for energy and precious metals, while industrial metals and agriculture were mixed for the week.  Natural gas prices rose several percent for the week, while crude oil declined slightly by just over a percent to $64.94—led by reports of rising inventories and analyst reports calling for cheaper oil in coming months.

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.