Weekly Economic Update

Economic Update 10-01-2018

  • Economic data for the week was highlighted by the Federal Reserve raising rates by a quarter-percent as expected, final GDP data for the second quarter coming in unchanged yet strong, mixed results for housing, and decelerating but also strong industrial data.
  • Global equity markets lost ground for the week, with the U.S. outperforming foreign regions generally.  Bonds were little changed in keeping with a flattish yield curve, despite the Fed raising rates.  Commodities gained several percent due to the continued momentum of rising crude oil prices.

U.S. stocks lost ground for the week due to trade uncertainty (again), as new Chinese tariffs took hold, hopes of talks to pull back on further tariff escalation broke down (again), as well as perhaps some political wrangling around Supreme Court nominee Kavanaugh.  Well after market close for the week, the U.S. and Canada did reach an agreement on Sunday to revise NAFTA (now renamed the U.S.-Mexico-Canada Agreement), which included updated terms to address specific issues with financial services and digital business considerations that weren’t in the picture in the early 1990’s when NAFTA was first introduced.

From a sector perspective, technology, energy and health care ended in the positive for the week, while materials and industrials suffered the most severe losses, with the former down -4%.  Speaking of sectors, as was initially announced several months ago by S&P and MSCI, the new ‘Communications Services’ sector was unveiled at quarter-end.  Intended to replace the narrower Telecom Services sector (which held a market cap of less than 2% of the index), the newer, more expansive sector definition contains media, entertainment, and interactive tech—including such heavyweights as Google, Facebook, Disney, Netflix and Comcast, in addition to the older telecom names including Verizon and AT&T—with the total now at a more substantial 10% index weight.  Proportionally, weightings in the consumer discretionary and information technologies sectors have been reduced.  Being more of a reshuffling than anything else, the change isn’t likely to result in any major disruption, but will alter sector composition reports, etc. for various managers and products.

Foreign stocks fared worse, especially in Europe, with the U.S. dollar strengthening by a percent, and an Italian budget deal creating a deficit several times wider than expected and could be the catalyst for more conflict with European leaders as well as ratings downgrades.  Japan, on the other hand, gained ground.  Emerging markets were also down for the week, with sharp recovery rebounds in Russia and Turkey not able to fully offset losses in China and India.  Shares in Argentina, however, continued to plummet downward upon reports that the government may need additional stabilizing funds from the IMF as well as strikes and other signs of some increasing social unrest.

U.S. bond indexes ended the week just slightly higher, as initial gains in the 10-year treasury yield moved up towards 3.1% as the Fed raised rates, but fell back as the commentary following remained more dovish than expected—resulting in minimal changes in the treasury yield curve on net for the week.  Investment-grade corporate, bank loans and high yield bonds fared largely in line with treasuries.  Foreign bonds were severely hampered by a +1% rise in the U.S. dollar, equating to a near -2% loss for developed market debt, while emerging markets fared positively due to lower spreads—ending the week with the best performance of any fixed income segment.

Commodities gained several percent, despite the headwind of a stronger dollar.  While agricultural products and industrial metals lost ground slightly, the energy sector gained sharply on the back of crude oil continuing its run, up +3.5% on the week to over $73/barrel.

 

Period ending 9/28/2018 1 Week (%) YTD (%)
DJIA -1.07 8.83
S&P 500 -0.51 10.56
Russell 2000 -0.86 11.51
MSCI-EAFE -0.88 -1.43
MSCI-EM -0.34 -9.54
BlmbgBarcl U.S. Aggregate 0.17 -1.60

 

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
9/21/2018 2.18 2.81 2.95 3.07 3.20
9/28/2018 2.19 2.81 2.94 3.05 3.19

 

 

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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