Economic Update 5-21-2018
- Economic data for the week came in generally strong, with retail sales, industrial and manufacturing data, jobless claims and leading indicators all coming in solidly positive. Housing starts, however, declined more than expected.
- U.S. equity markets were mixed on the week with large-caps underperforming small-caps, which gained. Emerging markets lost significant ground due to a variety of country-specific issues. Bond prices declined with rising rates, with the exception of bank loans. Commodities continued their push upward on the back of higher oil and agricultural prices.
U.S. stocks were mixed on the week with large caps losing some ground, while small caps gained over a percent to continue their strong run—the week featured decent economic data but fears these strengths could continue to translate to higher interest rates. From a sector standpoint, strong oil prices continued to buoy energy and materials names, while utilities and technology brought up the rear, with defensive sectors continuing to be hampered by fears of higher rates more than other areas.
The dollar rose over a percent for the week, which dampened the returns for foreign equities, turning minor returns into minor losses. U.K. and the pound fared among the best, with reports of the U.K. government desiring to preserve certain key trade relationships with the EU post-Brexit, while Italian stocks languished in the negative as political alliances between different factions (far right versus populist) pointed to plans for potentially requesting a debt forgiveness program. While Japanese stocks have been on a winning streak in recent weeks, first quarter GDP shrunk by -0.6%, which was a bit worse than expected. Emerging markets fared the worst of the group, with a larger loss of over two percent, led by weakness in Brazil, where stocks fell -10% during the week at one point, resulting in a temporary trading halt, as new bribery allegations surfaced against the president. Mexican stocks declined in reaction to a delay in the renegotiation of NAFTA, which looks to be pushed into next year.
U.S. bonds lost ground again as interest rates continued to tick upward for longer maturities—the 10-year treasury reaching a seven-year high of 3.12% on Thursday—while the short end of the curve was little changed. Credit spreads widened, which resulted in government bonds outperforming corporates, although floating rate bank loans led the various groups with flattish results. Foreign bonds, as expected, lost significant ground on the week due to the stronger dollar, with emerging market local bonds taking the brunt of losses. Several emerging market debt issuers, notably Argentina and Turkey, have been struggling as of late as recently re-strengthened U.S. dollar, internal politics and questions about central bank effectiveness have resulted in increased volatility. This has a tendency of happening when investors become too complacent in emerging markets and certain spreads fail to adequately compensate for these behind-the-scenes issues that can crop up from time to time.
Real estate suffered for the week, losing over -3% as interest rates continued to act as a strong headwind to prices. Residential fared worse, with recent metrics showing a degree of overbuilding and perhaps overpriced conditions for apartments, while foreign real estate suffered less, despite the strength of the dollar. Naturally, as REIT returns have been challenged this year, due to the expectations for, and realization of, rising interest rates, shares for a variety of groups are substantially discounted to underlying net asset value. This can imply that underlying NAV’s may decline, as well as the impact of simply poor sentiment, which is no doubt the case.
Commodities generally gained on the week, despite the usual headwind of a strong dollar. Agricultural prices and energy both gained, with the latter boosted by weather- and production-related effects in wheat especially. The latter was driven by oil prices rising almost another percent to end the week at $71.37/barrel for West Texas crude, while Brent crude continued to be priced at just under $80, with European supplies much more tightly tied to the Middle East. Precious metals prices continued to decline as higher real rates for bonds proved more attractive for risk-avoidant investors than did gold.
|Period ending 5/18/2018||1 Week (%)||YTD (%)|
|BlmbgBarcl U.S. Aggregate||-0.46||-2.73|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
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.