Economic Update 11-26-2018

• On a holiday-shortened week, economic data consisted of growth, albeit at a tempered pace, of the Leading Economic Indicators, mixed housing data and jobless claims, as well as weaker durable goods orders and consumer sentiment.
• Global equity markets declined for another week, as all regions fell back in unison.  Bonds were mixed as U.S. high quality bonds were little changed, but foreign bonds were negatively impacted by a stronger dollar.  Commodities were again punished by another large decline in the price of crude oil.

In a holiday-shortened week, U.S. stocks suffered several negative days, in fact the worst Thanksgiving week since the 1940s, which has been somewhat historically unusual for later weeks in the year.  Overall, the S&P ended down nearly -4% as stocks again tested lows from last month.  From a sector standpoint, defensive utilities, consumer staples and healthcare held up best, while technology and energy suffered the most, each with losses over -5% on the week.

Comments from the Vice President about China’s trade policies were taken negatively, but concerns about global growth appear to be another key factor.  The upcoming G20 meeting this week will likely be a focus, as the U.S. and China will have another chance to formally discuss trade.  The technology sector has been the primary catalyst in the recent market weakness, chiefly in terms of global product demand in this part of the cycle.  While the catalysts seem minor, such as Apple’s decision to no longer report unit sales of its various products—the pervasiveness these products led to analysts often looking to iPhone and iPad sales as an indirect measures of the health of the consumer.  The removal of this data was taken by some as a negative sign of overall slowing.  The overhang of potential increased regulation in the social media sphere remains another element that has bi-partisan Congressional support and, if implemented, could serve to certainly dampen prospects for certain firms.  In some respects, the pullback should be no surprise, as stocks in the FAANG group (Facebook, Amazon, Apple, Netflix, and Google/Alphabet) have been the market ‘darlings’ that could do no wrong and shot up exponentially to higher and higher valuations; all members of that club are now in -20% correction territory.  Oil prices have also been a source of concern, also related to fears of slowing global growth; however, while this affects energy sector earnings negatively, consumers and businesses generally benefit from cheaper energy prices.

Despite a stronger dollar, foreign stocks fared better than domestic, as Japan and the U.K. outperformed Europe and emerging market regions.  As with recent weeks, sentiment remains focused on fears over global slowing and U.S./China tensions, but more specifically on the viability of the Brexit package, which needs parliamentary approval, as well as the contention between the EU and Italy over the latter’s proposed budget, which it has stubbornly refused to amend.  The EU again finds itself in a difficult position, as buckling to an individual nation’s demands (with higher Italian deficits largely done to satisfy internal political aims) runs against the greater good of the EU as a whole and prevention of debt distress.  At the same time, the EU is very much invested in a cohesive set of member states, as even rumblings of a departure have caused a poor financial market reaction.

U.S. bonds were flat on net, as treasuries benefited from increased flows, while corporate bonds lost ground as spreads widened, particularly in high yield.  Foreign bonds fared poorly, as a stronger U.S. dollar pushed returns into the negative, although emerging market local bonds ended the week with positive returns, compared to weakness in dollar-denominated EM debt.

Real estate suffered minimal losses, despite weakness in equities broadly, and REITs in Asia outperforming with positive returns.  Domestically, apartment/residential real estate fared decently, as it has year-to-date, along with weakness in the housing market.

Commodities lost significant ground as all broad sectors ended in the negative, and the dollar strengthened.  Although natural gas gained a bit again due to weather vs. available supply dynamics, the energy group overall was led downward by the price of crude oil falling by another -11% to end the week at just over $50/barrel.  As discussed previously, this decline has surprised many by its swiftness, but remains largely the result of higher supplies than expected, with Iran essentially staying on line for now, via the granted production exceptions (to Saudi Arabia’s chagrin), while fears over slowing growth overall have reined in speculation on oil prices moving higher.

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.