Weekly Economic Update

Economic Update 12-24-2018

  • In a busy week for economic data to nearly wrap up 2018, the Federal Reserve raised interest rates by another quarter-percent.  In other economic data, sentiment, leading economic indicators and jobless claims remained strong; durable goods orders and several manufacturing surveys, were positive but lackluster; and housing data was mixed.
  • U.S. equity markets suffered mightily again last week, with a variety of concerns weighing on investors’ minds.  Foreign stocks lost ground as well, although emerging markets held up better than developed markets.  Government bonds fared decently due to the movement away from risk and lower long-term yields.  Commodities struggled due to a double-digit decline in the price for crude oil.

U.S. stocks suffered one of the worst weeks in some time, due to the confluence of a variety of factors discussed above.  Toward the end of the week, political wrangling about the potential government shutdown cast an overall negative shadow on markets.  From a sector standpoint, utilities and materials fared ‘best’, with declines just under -5%, while energy stocks fared worst, with declines of nearly -9% on the week, although consumer discretionary stocks were just behind.

An area that has experienced an especially severe price decline has been U.S. small cap stocks.  Traditional valuation discounts of small caps to large caps have been reduced in recent years—perhaps due to an over allocation to the asset class based on historical long-term outperformance tendencies—and it appears some investors could be tilting towards the group as a ‘safe haven’ from global tariff concerns.  Of course, the flip side is that the higher beta of small cap reflects their higher economic sensitivity, and explains their recent poor performance.

Foreign stocks declined as well, but not to the same degree as domestic equities, helped by a half-percent decline in the dollar.  The U.K. fared best, while Japan underperformed to the greatest degree in developed markets.  Economic slowness and possible implications of Brexit continue to weigh on European equities, but it remains to be seen whether current valuations have finally priced in these various scenarios.  Emerging markets fared best of all, with minimal losses—India and Turkey were significantly positive performers, with lower energy prices helping lower import costs and removing significant headwinds.

U.S. bonds rallied, as expected, due to cash flows moving away from risky assets and into cash and fixed income.  Yields fell across the treasury yield curve by about 10 basis points, benefitting long-term treasuries, while wider credit spreads punished high yield bonds especially, which lost several percent on the week.  Foreign developed market bonds were slightly higher in local terms, but benefitted sharply from the weaker dollar.  Emerging market debt had largely the same effect, albeit to a lesser degree.

Real estate in the U.S. suffered largely in line with broader equities, with the more economically-sensitive groups, such as regional malls, suffering far more than residential.  Foreign REITs outperformed due to the weaker dollar effect.

Commodities declined in most areas, despite the normal tailwind of dollar weakness.  Precious metals gained, with positive flows to gold, but were overwhelmed by a sharp decline in the energy sector.  The price of crude oil experienced its worst week in nearly two years, falling by another -11% to an 18-month low at just under $46/barrel.  As with equities, fears of a slowing pace of global growth in 2019 and corresponding negative impacts on energy demand, in addition to the larger-than-expected supply conditions, have created another perfect storm for prices on the downside.  A negative for the commodity asset class and energy stocks, lower oil prices are no doubt a positive for users.

 

Period ending 12/21/2018 1 Week (%) YTD (%)
DJIA -6.87 -7.13
S&P 500 -7.03 -7.87
Russell 2000 -8.39 -14.81
MSCI-EAFE -2.64 -14.54
MSCI-EM -1.50 -17.36
BlmbgBarcl U.S. Aggregate 0.45 -0.45

 

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
12/14/2018 2.42 2.73 2.73 2.89 3.14
12/21/2018 2.39 2.63 2.64 2.79 3.03

 

 

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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