Weekly Economic Update

Economic Update 11-19-2018

  • Economic data for the week was highlighted by higher retail sales, driven by energy prices, mixed regional manufacturing results, tempered inflation and jobless claims that rose slightly.
  • Equity markets in the U.S. and developed Europe declined last week, while emerging markets fared positively, as sentiment improved.  Flows away from risk and falling interest rates benefitted fixed income.  Commodities were mixed but were generally led lower by a continued decline in crude oil prices but a sharp spike higher in natural gas.

U.S. stocks experienced a negative week, as negative sentiment toward former market darlings in technology and related groups continued, including concerns over forward-looking prospects for Apple and Amazon.  However, markets were teased in both directions, on the negative side with threats of further auto tariffs, while later in the week hopes for a deal with China improved again for the time being.  From a sector standpoint, materials recovered to become the sole sector (along with real estate) to earn positive returns for the week.  Leading negative results were consumer discretionary and technology.

Foreign stocks were down in developed markets, but rebounded strongly in emerging as China, Brazil and India all ended the week with gains as investors appeared to rediscover bargains in the EM region.  Japanese markets lost ground in keeping with the group, as third quarter GDP came in a bit worse than expectations at a negative -1.2%—negatively affected by weather, lower exports and poor consumption.  The U.K. experienced among the worst losses, in keeping with a weaker pound, as the release of the highly anticipated Brexit Withdrawal Agreement came with political turmoil, with cabinet members continuing to resign amidst the disagreement with underlying terms.  Notably, this surrounded the amount of European control over terms and details surrounding the Northern Ireland trade region, which is the only geographic land border between the U.K. and EU.  (It’s important to note that cabinet resignations and similar displays of dissidence are quite common abroad, so don’t tend to raise the type of alarm we would likely see in the U.S. following a similar round of rash resignations.)  Parliament has yet to approve the agreement, which could likely be described as a ‘soft Brexit’ scenario, as opposed to the other options of no agreement (or ‘hard Brexit’) or even referring the matter to a second referendum—neither of which look to be ideal.

To add a second negative for Europe on the week, Italy rejected demands from the EU to lower proposed deficit/debt levels.  If this remains unresolved, Italy could be the recipient of monetary penalties imposed by the European body.  The key continuing issue is based on a mismatch in the projections made by each party—Italy claims forward-looking growth over the next several years should be sufficient to reduce worry about larger deficits, while the EU projects Italian GDP growth to be only around +1% in coming years, which naturally pressures the ability to pay back debt created by these deficits, that have largely been created out of political promises for enhanced social program spending.

U.S. bonds gained due to flows back into fixed income, leading rates about 0.10% lower across the longer end of the yield curve.  Treasuries fared best, while spreads widened, which punished investment-grade corporates, and especially high yield and floating rate bank loans.  Foreign bonds gained in developed markets due to a weaker dollar, with an especially robust week in emerging market local debt, which rose nearly a percent.

Real estate gained slightly, with help from lower interest rates, while foreign REITs were generally flat, with the exception of the U.K., which fell in keeping with pound weakness.

Commodities were mixed as metals and agriculture gained slightly, while energy overall lost ground.  The price of oil continued to decline beyond correction territory, with both fears of slowing demand and higher supplies than expected online took their toll.  West Texas Intermediate Crude fell nearly -6% on the week to end at just under $57/barrel, although Saudi Arabia announced plans for a cut in exports to stem the decline.  The even more dramatic story was that of natural gas prices, which rose over +15% by the end of the week, to the highest levels in four years, with inventories remaining lower than expected following a low price environment last year, along with early winter weather in key regions of the U.S.

 

Period ending 11/16/2018 1 Week (%) YTD (%)
DJIA -2.15 4.87
S&P 500 -1.54 4.11
Russell 2000 -1.37 0.55
MSCI-EAFE -1.43 -9.27
MSCI-EM 1.04 -14.86
BlmbgBarcl U.S. Aggregate 0.47 -1.95

 

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
11/9/2018 2.36 2.94 3.05 3.19 3.40
11/16/2018 2.36 2.81 2.90 3.08 3.33

 

 

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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