Economic Update 4-09-2018

• Economic data for the week was led by weaker-but-still-robust reports for manufacturing and non-manufacturing activity, yet mixed results for jobless claims and a weaker-than-expected employment situation report for March—likely weather-affected.
• U.S. equity markets swung dramatically in both directions during the week, ending lower with ongoing market concerns over trade tariffs.  European equities bucked the trend by gaining ground, while emerging markets declined.  Bonds were flattish to slightly negative as interest rates ticked up again during the week.  Commodities declined a few percent as positive results from non-energy groups were unable to offset declines in crude oil.

U.S. stocks ended a roller-coaster week nearly flat, as losses early in the week in response to trade concerns abated by Thursday, with rhetoric from the administration meant to downplay impact of the tariffs, but appeared again Friday as markets fell sharply for the same reason.

Volatility has substantially increased in recent weeks, with the latest catalyst being the imposing of tariffs by the U.S. (and by China, in retaliation) on a variety of goods.  The tempered jobs report on Friday was not taken as poorly as it could have been, perhaps in a realization it could keep the Fed’s pace of rate increases tempered if labor growth stabilizes.  Next week begins the flurry of Q1 earnings reports, which could shift some focus away from the tariff talk.

Every sector lost ground during the week, with energy faring best with losses of just a few basis points, and defensive sectors consumer staples, utilities and telecom just behind.  Technology and industrials fared worst, with larger anticipated impacts from tariffs, as tech hardware and industrial equipment are among the most significant U.S imports from China—so would be the most negatively affected by rising input costs.

Foreign stocks were mixed with a slightly stronger dollar weighing on results minimally.  Stocks from Europe and the U.K. gained, as stronger economic results—and unemployment falling to its lowest levels in nearly a decade—outweighed broader trade concerns that appear to be driving equity results as a group globally in recent weeks.  European PMI has been ticking downward a bit as of late, although it remains solidly in over-50 expansionary territory.  Some fears have rising around a possible deceleration of European growth, which could ultimately trail into a slower pace of earnings growth recovery, but growth overall continues to remain solid.  Emerging markets saw declines with China and Brazil suffering most from global trade fears.

U.S. bonds declined slightly, with government losses offset by minimal gains in investment-grade corporates.  High yield bonds fared better, as spreads contracted a bit.  A stronger dollar pushed minimal losses in foreign developed market debt from rising rates into deeper negative territory.

Another under-the-radar story is the resurgence of LIBOR rates.  The 3-month version has risen almost a percent over the last six months to reach its highest levels since 2008.  While rising short-term treasury rates appear to play an obvious role in higher yields for a variety of related indexes, there also appear to be technical factors at play as U.S. companies sell short-term commercial paper (driving prices down and rates up, like all bonds) to repatriate cash domestically in response to tax reform.  LIBOR is going away anyway in three years, to be replace by another short-term bogey, but remains relevant for the time being as a primary base index for corporate loans of all types, and even residential and consumer revolving debt.

Real estate lost some ground, but to a far lesser degree than U.S. equities.  Apartments experienced gains, while industrial REITs suffered on par with broader tariff-related concerns for industrial activity.  Asian and European REITs fared better, with gains, in keeping with better results abroad, despite a stronger dollar.

Commodities declined due to a drop in the energy sector.  West Texas intermediate crude oil fell by over -4% on the week to $62.06 to end the week, despite inventory declines and lower rig counts, as investors became increasingly concerned over possible effects of tariff talk on oil demand.  Natural gas declined to a much lesser extent.  Other segments, including metals and agriculture gained ground for the week partially offset energy’s weakness.

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.