Economic Update 8-06-2018

• Economic news during the week was highlighted by the Fed’s decision to keep interest rates steady, a lukewarm employment situation report for July but stronger labor data in other reports, decent housing numbers, but weaker ISM manufacturing and non-manufacturing numbers held back by tariff concerns.
• U.S. stocks gained ground on the week, and offset losses in foreign stocks as the dollar strengthened.  U.S. bonds were little changed, but outperformed international bond markets due to the same dollar effect.  Commodities fell a bit, with most segments losing ground, including oil.

U.S. stocks gained on the week, with tariff news acting as a tailwind early on, with rumors of restarted talks to avert a trade war, which seemed to move markets minimally, while some concern surfaced over the $200 bil. of goods slated for a 10% tariff being upped to a 25% tariff.  Speculation continues about how serious these threats are, versus remaining an expensive bluff.  Sandwiched between were continued solid earnings results for the prior quarter, with earnings gains per share helped by cash flow growth but also share buybacks, particularly in the technology area, where various analyst debate the sustainability of strong recent fundamentals vs. longer-term valuation conditions.  August has traditionally been a strong month for buyback activity, following the restricted period around Q2 earnings.  From a sector standpoint, defensive sectors health care, consumer staples and utilities outperformed during the week, gaining several percent, while energy lost a few percent.

Apple achieved a $1 trillion market cap, an equity first, putting the stock in the headlines as large round numbers often do, but offered little relevance otherwise.  We are often reminded at how ‘firsts’ either prove to be just a number on the road to a higher number that is less newsworthy, or the hype can signal a pinnacle of investor sentiment.  Interestingly, the top five or ten companies by size in the S&P tend to change quite dramatically from decade to decade.

Foreign stocks lost ground globally, not helped by a stronger dollar, with losses around a percent in both developed and emerging markets.  In the latter, Chinese stocks lost nearly -4% to add to an already poor year-to-date performance, led by concerns over the impact of proposed U.S. tariffs on the Chinese export economy.  The Bank of Japan kept policy unchanged, but added some flexibility of just under a quarter percent around their 0% target for their 10-year bonds.  The absolute amounts are very small, but investors there are much more tuned into the tone of policy and how long this stimulative regime could last in light of very low inflation.  On the other hand, the Bank of England raised rates by a quarter percent, despite a mixed tone about rising debt levels and weaker economic data recently.  European sentiment was also held back by trade concerns and economic growth that came in at a slower rate than expected.

U.S. bonds gained some ground on the week, with little change in the treasury yield curve.  Credit outperformed governments slightly, with high yield performing best as spreads tightened.  Internationally, bonds fared poorly as a stronger dollar weighed on both developed and emerging markets—the latter of which has been under pressure under the past quarter especially with investor flows exiting emerging market debt.

Real estate gained several percent on the week, outperforming most other asset groups, with several sectors performing well, and only lodging/resorts and mortgages lagging.  Domestic REITs outperformed European and Asian real estate, which were held back by a stronger dollar.

Commodities fell overall during the week, in keeping with a stronger dollar and mixed trade tensions.  Agriculture was the only gainer, with strength in wheat prices, while energy and industrial and precious metals declined.  Crude oil fell during the week by a fraction of a percent to end the week over $68/barrel.

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.