Economic Update 5-14-2018

• Economic data for the week was highlighted by lower-than expected inflation as measured by PPI and CPI, decent consumer sentiment, as well as continued strong labor numbers.
• U.S. markets gained sharply last week, with foreign equities also performing positively, although to a lesser degree.  Bonds were little changed, with corporates outperforming governments; foreign bonds lost a bit of ground overall.  Commodity prices gained generally, due to an uptick in the price of crude oil sparked by the U.S.’s exit from the Iran nuclear deal.

U.S. stocks experienced a sharply positive week, with small caps again outshining large caps.  While there did not appear to be one specific catalyst, tempered inflation results likely helped, sentiment has improved surrounding the potential ability of the U.S. and China to resolve trade differences, and earnings continue to register strong results for the quarter, with gains on the order of around +25%.  From a sector standpoint, energy led the way with higher oil prices, followed by technology, financials and industrials with roughly equal returns.  Defensive sectors utilities and consumer staples lagged, with the only negative returns for any sector for the week.

Foreign stocks also fared well, with the U.K. leading the way with the strongest returns, while the Bank of England elected to stand pat on interest rate policy, which was somewhat of a surprise.  Europe and Japan posted more tempered results—all of which were below those of the U.S.  Emerging markets fared better, on par with domestic equities.  China, Brazil and Russia all gained several percent on the week, with the latter due to continued strength in commodity prices, including crude oil.

U.S. bonds on net were flattish again on the week, with interest rates ticking slightly higher across most of the yield curve.  Investment-grade credit fared better, with positive returns, as spreads tightened, as did high yield, in keeping with strong equity performance, while government bonds lost a bit.  The dollar was little changed on the week, but foreign bonds lost a bit of ground in both USD and local terms in both developed and emerging markets.

Real estate gained sharply, in keeping with the broader U.S. stock market, led by gains in more cyclically-sensitive lodging and industrial/office, with European and Asian REITs coming in just behind, followed by domestic retail and apartments registering minor gains.

Commodities generally gained on the week, led by a sharp rise in the energy sector, followed by precious metals, while agriculture sharply declined due to larger-than-expected crop yields for wheat and other grains.  The President’s scrapping of the Iran Nuclear deal and promise to revert back to sanctions caused oil prices to shoot up nearly +3% immediately, to over $70/barrel, with lower production assumed, coupled with already-low inventories.

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.