Economic Update 9-10-2018
- Economic data for the week was dominated by a decent employment situation report for August, continued strong results in other labor metrics, as well as positive results from the ISM manufacturing and non-manufacturing surveys.
- U.S. equity markets declined for the holiday-shortened week, as did foreign stocks with continued weakness in emerging markets. Bonds fell also as interest rates ticked higher. Commodities ticked downward along with lower crude oil prices.
U.S. stocks gained for the week with optimism over progress in trade policy—specifically, a preliminary NAFTA revamp involving the U.S. and Mexico, although the Canadian component is yet to be determined. Thus far, the agricultural component would remain duty-free, while the auto production would include higher requirements for regional content (a surprising number of vehicles are assembled in Mexico these days). Intellectual property provisions were also included, which appears to be less problematic in North America than it is with trade elsewhere, but remains a key hot button for all of the administration’s trade negotiations. From a sector standpoint, technology and consumer discretionary stocks outperformed with gains around the +2% level, while utilities and telecom lagged with negative returns. Strength in the tech sector drove the NASDAQ index past the symbolic 8,000 level for the first time. Overall, August was a solid month, with gains over +3% for U.S. markets, with technology, consumer discretionary and healthcare continuing their market leadership stretch.
Foreign stocks were mixed with Europe and the U.K. coming in negative, while Japanese stocks gained with additional strength in retail sales. Hopes for a smooth Brexit improved sentiment a bit following comments from the EU that alluded to an offer to the U.K. of a unique ‘close relationship’ and ‘unprecedented partnership’, despite details needing to be worked out, although internal political differences between the ‘soft’ and ‘hard’ Brexit camps continue to weigh on the deal’s progress within the U.K. In emerging markets, Russia and the Asian periphery fared decently on the week, while Turkey and Argentina were hit hard in USD terms due to ongoing currency weakness. The Turkish lira fell a further -10% decline due to a Moody’s downgrade of several dozen financial institutions, while Argentina was negatively impacted along with a government request for a faster delivery of the IMF’s $50 bil. bailout package. While contagion risk can never be ruled out, current consensus views the problems in these two nations as relatively isolated incidents, but stark reminders of the ever-present risks apparent with emerging market equity and debt. Foreign equities provided the opposite result compared to U.S. equities in August, down several percent overall—hampered by the dollar’s strength, Brexit negotiations and broader global trade concerns.
U.S. bonds declined a bit on the week as interest rates ticked up across the yield curve. Treasuries outperformed investment-grade corporates slightly, although high yield bonds and bank loans ended at the head of the pack with positive returns for the week. The dollar was little changed on the week, resulting in foreign developed market bonds ending the week flat, while emerging market local debt lost several percent—led by index components Turkey and Argentina noted above.
Real estate indexes gained in both the U.S. and abroad, led by strength in the healthcare and lodging/resort sectors, while regional malls declined sharply. For the month of August, REITs gained just under the +3% pace of broader equity markets.
Commodity prices were higher in the energy and agricultural sectors, while industrial and precious metals declined. Crude oil prices rose by over a percent to just under $70/barrel, with an upcoming Gulf Coast hurricane and supply concerns in large producer Nigeria due to an ongoing port blockade by disgruntled workers.
|Period ending 9/7/2018||1 Week (%)||YTD (%)|
|BlmbgBarcl U.S. Aggregate||-0.45||-1.40|
|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.