Weekly Economic Update

Economic Update 11-05-2018

  • Economic data for the week was highlighted by a decent government employment report, as well as strong results from other labor measures, and stronger consumer confidence, yet weaker manufacturing data.
  • Equity markets in both the U.S. and abroad bounced back last week, gaining several percent.  On the other hand, fixed income markets ended the week negatively due to flows back toward risk and rising interest rates.  Commodities lost several percent solely due to the higher crude oil supplies, which drove prices down sharply.

U.S. stocks rebounded last week, following a painful October, during which many indexes reached -10% correction territory (some might argue they were long overdue).  The improvement in sentiment appeared to be due to hopes, alluded to by the President, that a trade deal with China was in the works—showing how desperate the market appears to be for more trade certainty—as well as a positive employment report.  In keeping with more cyclically-sensitive assets outperforming during the week, the materials and consumer discretionary groups led with the strongest gains, while defensive stalwart utilities lagged with a slight decline, as interest rates moved higher.  Tech also underperformed due to a poor response to Apple’s earnings report on Friday, which included cautious comments about holiday sales as well as their decision to no longer individually report on sales for various phone, tablet and computer products (which many analysts have come to rely on as an economic bellwether of sorts).

Earnings season is coming to a close, with somewhat mixed results.  Earnings growth on average came in above expectations (close to +25%), but less than a third of companies outperformed on the revenue side.  This could be an inflection point between the tax-cut fueled mid-cycle burst of high growth and a later cycle trend of positive but decelerating growth.  This is still being hashed out, but a few items have risen to the surface in terms of concerns, including ongoing tariff uncertainty, difficulty in finding quality workers and higher wage growth as a byproduct, and the rising cost of financing due to higher rates.  All affect input costs, which can put pressure on underlying corporate profit margins, which are now running at peak levels (meaning they can likely only deteriorate from here).  As discussed last week, these same items no doubt played a role in the recent negative investor sentiment towards equities as well.

Foreign stocks also recovered in line with U.S. names, with Europe and the U.K. outperforming Japan by a bit, and emerging markets leading the way among regions.  Hopes for a resolution to U.S.-China trade issues continues to drive global sentiment, particularly as European earnings growth has not kept up with that in the U.S.  Additionally, third quarter EU GDP decelerated to a mere +0.6% increase, down over a percent from the prior quarter, as well as manufacturing PMI falling below an expansionary 50 level—demonstrating weaker momentum overall and greater sensitivity to trade concerns.  Rumors of a Brexit deal continue to swirl, with several outstanding issues remaining, such as treatment of the Ireland (EU) and Northern Ireland (U.K.) border.  Emerging market stocks were generally positive, with improved sentiment in China regarding potential progress toward a tariff agreement; in Brazil, following the election of a populist presidential candidate who’s promised an agenda of reforms, a friendlier business environment and smaller government; as well as in India, along with declines in oil prices, which represent a key input cost.

U.S. bonds pulled back as flows moved back toward risky assets and interest rates moved higher.  Due to spread movements, corporates outperformed treasuries slightly, although both groups were negative, while high yield and floating rate bank loans ended with gains for the week.  Foreign bonds in developed markets performed similarly to U.S. debt, while emerging market local bonds continued to recover with gains and a return to risk-taking during the week.

Commodities lost several percent during the week, due almost exclusively to the energy sector, while other segments were little changed.  Crude oil prices fell almost -7% to just over $63/barrel, due to ramped up U.S. and Russian supply, coupled with several exemptions granted by the U.S. for upcoming Iranian sanctions.

 

Period ending 11/2/2018 1 Week (%) YTD (%)
DJIA 2.36 4.05
S&P 500 2.45 3.45
Russell 2000 4.35 1.82
MSCI-EAFE 3.36 -8.17
MSCI-EM 6.08 -13.96
BlmbgBarcl U.S. Aggregate -0.73 -2.65

 

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
10/26/2018 2.33 2.81 2.91 3.08 3.32
11/2/2018 2.33 2.91 3.04 3.22 3.46

 

 

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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