Economic Update 9-24-2018

• Economic data last week showed continued signs of expansion, seen by a continued upward trend in an index of broad leading economic indicators, as well as stronger manufacturing and job markets; however, housing data continued mixed.

• U.S. equity markets rose to hit new highs, but were surpassed by foreign stocks, helped by a weaker dollar.  Domestic bonds lost ground with higher interest rates, while emerging market debt fared better.  Commodities gained with currency impacts and higher oil and metals prices.

U.S. stocks, as represented by the Dow and S&P, again reached new highs.  By sector, materials, financials and energy gained by over 2%—the latter two positively impacted by higher interest rates and oil prices.  Utilities lost the most ground, down over a percent, also due to rising rates, which tends to be the nemesis of more conservative, dividend-based characteristics of that sector.  Real estate suffered the same fate of negative returns, albeit to a far lesser degree; however, foreign REITs benefitted from the weaker dollar effects.

It seemed the early week announcement of a 10% tariff on $200 bil. of Chinese goods didn’t rattle the market as was first feared, perhaps due to the tariff rate ending up below the initially advertised 25%.  (Although the higher rate has still been declared to begin at year end, absent other action taken before then, although plans for hoped-for talks appeared to break down on Friday.)  Excluded from the tariff group were several high-profile consumer product segments, including Apple’s Watch and AirPods, other smartwatches, as well as safety gear, such as bicycle helmets, baby car seats and bedding.  Naturally, political impacts have played a strong role in the implementation of these policies, particularly in the weeks before mid-term elections.  The Chinese responded with $60 bil. of their own tariffs on U.S. goods—mostly focused on agriculture.

Foreign stocks gained in both developed and emerging markets, with help from positive sentiment in the U.S., but surpassed domestic returns with help from a far weaker dollar.  Japanese stocks fared especially well, with the re-election of Prime Minister Abe to a third term, providing policy consistency, and the Bank of Japan reaffirmed its current monetary easing stance due to low inflation.  Despite the implementation of further tariffs, Chinese stocks rallied, with government promises to stimulate the economy—effects that could offset damage inflicted by U.S. tariffs on exports.  Correlations of foreign equities to U.S. stocks have been notably strong as of late, with sentiment continuing to be driven by weekly expectations for trade policy.

U.S. bonds lost ground on the investment grade side as interest rates moved higher across the longer end of yield curve, with the 10-year treasury note reaching a four-month high and surpassing the 3% level again.  The Fed is expected to raise rates again next week by a quarter-percent, which appeared to have helped move sentiment in a higher rate direction.  Floating rate bank loans fared well, as expected, while high yield fell just behind, with slightly positive returns.  Foreign bonds in developed markets performed largely similar to those in the U.S., while emerging market local currencies rallied by a few percent to buck their trend of negativity as of late—as the crises in Turkey and Argentina appear to remain self-contained that has given investors hope that the contagion has not spread to other emerging market nations.

Commodities rose on the week, along with a weaker dollar.  Industrial metals and energy provided the strongest gains, while agriculture and precious metals contributed slightly.  The industrial metals complex was led by heavy volume contributors copper and zinc, which each gained about +7% on news of tariff levels being set lower than feared.  The price of crude oil rose nearly +3% to just under $71/barrel, as OPEC members Saudi Arabia and Russia agreed to keep production at its current level (rather than expanding it further via other ‘exemptions); as well as reports surfacing that Saudi Arabia may be holding tighter inventories than expected for the highest-volume varieties of oil.

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.