Economic Update 12-17-2018

• Economic data for the week came in mixed to decent, with retail sales a bit stronger than expected, continued strength in job openings and jobless claims, as well as tempered producer and consumer inflation results.
• U.S. equity markets declined over fears of possible slowing growth, as did foreign stocks, with small gains turned to losses after being adjusted for a stronger dollar.  Bonds were mixed, with impacts dependent on duration, credit quality and currency last week.  Commodities lost ground due to the stronger dollar and continued falling energy prices.

U.S. stocks lost ground last week, with several indexes again reaching the -10% correction threshold from their peak points earlier in the year, and small- and mid-cap stocks reaching their lowest levels in a year.  Fears of a broader economic slowdown, as well as slower Chinese export activity and lackluster results in Europe seemed be the catalysts pushing sentiment lower last week.  Hopes continued to vacillate around the possibility of a U.S.-China trade deal again, with remarks from the U.S. administration pointing to a possible resolution of the recent Huawei CFO arrest in Canada being tied to a potential trade deal.  From a sector standpoint in the U.S., more defensive utilities and communication services saw small gains for the week, while energy and financials suffered with losses over -3%.

Foreign stocks were mixed, with positivity in the U.K. after Prime Minister May survived her party’s no-confidence vote, and Europe rose along with the ECB ending its €2.6 tril. monetary stimulus program last week (with the implication being the economy is strong enough to stand on its own two feet without it, although this outcome wasn’t a surprise).  However, both gains turned to declines following the currency translation, with the U.S. dollar rising nearly a percent on the week.  The strength of the dollar was indeed a direct result of weakness in the euro and pound, on the eve of continued uncertainty about the outcome of a final Brexit vote with a mere three months to go before the deadline of the deal needing to be made.  However, on the positive side, Italy has made progress in getting their budget for next year down to around a 2% deficit, compared to the 2.5-3.0% originally put forth in draft form.  Conditions in Japan have continued to demonstrate short-term weakness, with Q3 GDP falling at a -2.5% annualized rate—twice the level estimated in the initial report—although weather is being blamed as the primary culprit.  Little news emanated from emerging markets, although equities in Russia fell sharply, and Indian stocks gained ground—another reminder of continued stark contrast in dynamics between oil exporting and oil importing nations in the EM space.

U.S. bonds were mixed, with government flat to slightly down as treasury rates ticked higher across the middle of the yield curve, while corporate credit recovered with spreads again tightening.  Long bonds overall continue to have the worst returns year-to-date, down several percent due to a substantial duration effect, while intermediate-term bonds have suffered far less—and floating rate bank loans coming in as the only major U.S. bond group with positive returns for the year.  Foreign bonds in both developed and emerging markets fared decently in local terms, but, when translated for a stronger dollar, ended up with losses.

Commodities generally declined due to strength in the dollar and a pullback in energy prices, although all other groups lost ground as well, albeit to a lesser degree.  In a fairly range-bound week, crude oil fell -2% on net to end the week at just over $51/barrel, while natural gas prices fell back by -15%, while remaining about 30% higher year-to-date.

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.