Economic Update 6-04-2018

• Economic data for the week was highlighted by a slight reduction in Q1 GDP, strong manufacturing data, mixed housing data, but a stronger-than-expected employment situation report.
• Equity markets gained on the week in the U.S., but foreign stocks were held back by concerns in Europe.  Bonds fared well, with interest rates falling slightly.  Commodities declined, led by a pullback in crude oil pricing from recent highs.

On a holiday-shortened week, U.S. stocks ended with minor gains, helped signs of stronger economic growth, Friday’s optimism over the stronger-than-expected jobs report, reinstatement of the once-cancelled U.S.-North Korean meeting, and some resolution to political turmoil in Italy, with several populist parties agreeing on a deal to allow formation of a government.  The implementation of steel and aluminum tariffs on certain key trading partners did not appear to affect sentiment as of yet.  Small caps again outperformed large caps by about a percent, although the distinction between higher and lower quality stocks has become more pronounced.  From a sector standpoint, energy and technology led with gains over +2%, while financials ended up in the negative.

Foreign stocks generally lagged in both developed and emerging markets.  Brazil and Mexico were the big losers, as could be expected, given their reliance on global trade, while Asia fared better, with positive returns.  Europe suffered more than most, down nearly a percent, with fears about the new Italian government coalition’s anti-euro tone scaring investors, before finding some resolution.  Interestingly, the market reaction to Italy did not appear to be as negative as the media’s, as the nation’s flurry of governments since World War II (averaging almost one per year or two) has perhaps numbed the response.  When cooler heads have prevailed, most core nations have realized that pulling out of the eurozone block would be much more painful than remaining a member—perhaps the U.K. is finding this out as well, although the pound being a separate currency has softened the blow significantly.  Now, concern has moved to Spain, where lawmakers gave a no-confidence vote on a more conservative prime minister in favor of a socialist one.

U.S. bonds gained for the second straight week, to a lesser degree, as rates ticked down across most of the yield curve.  Government outperformed investment-grade credit, as spreads widened out.  However, high yield and floating rate bank loans ended flattish.  Foreign developed market bonds lost a small amount, with the dollar ending flat for the week, while emerging market bonds fell most substantially in U.S. dollar terms.  To no surprise, yields on Italian bonds, which had been trading at surprisingly low yields given the apparent risk, fluctuated wildly higher (the two-year rose almost 2% from previously negative yields on the news).  It is easy forget during a stretch of investor yield-seeking, depressing rates generally, that sovereign yields can be swayed sharply by underlying potential risks to their credit rating.

Commodities lost ground last week, with weakness in energy and agriculture outweighing prices gains in industrial metals, as tariff implementation fears flared up again.  Crude oil continued its pullback from last week, dropping -3% to end the week at $65.81/barrel, as signs surfaced of rising U.S. output.

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.