Weekly Economic Update

Economic Update 8-13-2018

  • Economic data for the week was light but led by stronger inflation implied by the consumer price index, less so for producer prices, while labor markets continued their run of strength.
  • Equity markets lost ground overall during the week, with additional concerns over global trade and a currency crisis in Turkey.  U.S. bonds, on the other hand, earned positive returns with lower yields, while foreign bonds lagged with the headwind of a strong dollar.  Commodities were mixed, with oil prices declining somewhat, and offset by strength in metals and other segments.

U.S. stocks ended the week down slightly, as positive returns during most of the week were brought down on Friday, with the worst day in several months.  The culprit was an extreme decline in the price of the Turkish lira, notably a -14% drop in one day (and over -40% this year), with a deterioration in U.S.-Turkish relations following tariff announcements on both sides and other geopolitical wrinkles, including the continued detention of a U.S. clergyman.  This wasn’t a one-week event, however, as Turkish markets have been under stress for several months as higher inflation there (exacerbated by higher oil prices, as it’s an oil importer) was followed by pressure on the central bank from Turkish President Erdogan to keep interest rates low—a mismatch compared to traditional policy when inflation is rising.  For perspective’s sake, Turkish equities represent less than a percent of emerging market stock indexes.  While much of the turmoil looks to be isolated to Turkey, which has been considered ‘fragile’ for some time anyway, as opposed to systematic issues that appear to threaten other emerging market nations, some concern lies over exposure of a handful of large European banks to the weaker lira.

From a sector standpoint, consumer discretionary and tech led with gains just under a percent, while consumer staples lost the most ground on the week.  Per FactSet, contrary to some expectations with 90% of S&P firms having how reported Q2 earnings, firms with a majority of revenue earned abroad outperformed those with a U.S. orientation for the period—led by tech, energy and materials.  Tesla made the news again, through more unconventional communications, with a tweet from founder Elon Musk alluding to taking the company private—one can only assume to avoid further public earnings releases and corresponding conference calls, as well as to punish the pessimistic and pesky short-sellers of the speculative stock.

Foreign stocks in developed markets experienced losses in line with U.S. equities in local terms, but fared worse when adjusted for the far stronger U.S. dollar.  In emerging markets Chinese stocks rallied with stronger-than-expected earnings, despite an escalation in tariff talk from the U.S.  Russia fell with the surprise announcement of additional U.S. sanctions, due to election meddling, as did Turkey, due to the sanctions and internal currency crunch noted earlier.

U.S. bonds gained ground, as equity assets sold off globally during the week and rates fell across the yield curve.  Treasuries fared better than corporates, as credit spreads widened.  Foreign bonds experienced similar gains in local terms, but these converted to losses when translated back to a sharply stronger dollar (up +6% versus developed market currencies year-to-date).  Emerging market local debt indexes fared especially poorly due to the exposure to Turkey and similarly-viewed nations, which experienced their worst week in some time.  Although Turkey’s weight in EM stock indexes is low, the nation represents over 5% of key EM bond indexes.

This is another good tangible example of how passive and active management can diverge.  While passive emerging market bond ETFs are required to match a hefty index weighting to a nation like Turkey, active managers aren’t—and, based on a few we’ve spoken with, haven’t been for some time, due to the very structural issues that came to a head last week.  This is an important evaluation area when looking at passive versus active management—not only any expected return potential but also differences in portfolio risk.

Real estate slid in the U.S., along with equities, with Asia losing a bit less and Europe a bit more.  The more cyclically-sensitive areas, malls and lodging/resorts suffered the most last week, although all sectors were in the negative.

Commodities generally were mixed, battling dollar strength and a pullback on optimism globally.  Energy and precious metals declined, while industrial metals and agriculture generally gained.  Crude oil ended the week down just over a percent to below $68/barrel, with dynamics vacillating between tight U.S. inventories currently and a lack of infrastructure to get new oil to market, coupled with additional Russian and Iranian sanctions, which could threaten supply further in the near term.

 

Period ending 8/10/2018 1 Week (%) YTD (%)
DJIA -0.44 3.82
S&P 500 -0.18 7.21
Russell 2000 0.82 10.63
MSCI-EAFE -1.46 -2.98
MSCI-EM -1.02 -8.29
BlmbgBarcl U.S. Aggregate 0.42 -1.08

 

U.S. Treasury Yields 3 Mo. 2 Yr. 5 Yr. 10 Yr. 30 Yr.
12/31/2017 1.39 1.89 2.20 2.40 2.74
8/3/2018 2.01 2.63 2.82 2.95 3.09
8/10/2018 2.05 2.61 2.75 2.87 3.03

 

 

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. 

 

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