Economic Update 1-21-2019

• Although limited to some extent due to the Federal government shutdown, economic data for the week included a slight decline in producer prices, weaker consumer sentiment, mixed regional manufacturing results, but strong industrial production and jobless claims.
• U.S. equity markets continued their recovery upward upon stronger sentiment, with foreign stocks in developed and emerging markets just behind.  Bonds ended the week with negative returns, as interest rates again ticked higher.  Commodities gained on the back of crude oil, which regained ground by several percent on the week.

For the fourth straight week, U.S. stocks continued to recover as investors appeared to regain their calm, following probabilities of the Fed continuing their program of raising rates this year falling.  Additionally, speculation over U.S.-China trade continued, with rumors of a possible U.S. rollback of tariffs to help calm markets and encourage better Chinese trade concessions.  Sector returns were led by financials, which gained 6%, led by strong early Q4 earnings results, while utilities ended the week as the only sector with a loss.  The latter was led by the announced bankruptcy of California-based Pacific Gas & Electric due to liabilities related to recent wildfires.

As earnings for Q4 2018 continue to roll in, results are no doubt expected to show growth at a slower pace than earlier in the year.  Expected year-over-year growth is 10-11%, per FactSet, with revenue growth of around 6%.  Other than sporadic cyclical growth in energy, the strongest numbers are slated to originate in industrials and communications services.  In addition, expectations for upcoming quarters in 2019 have also declined substantially, along with slowing overall economic growth, waning positive bottom-line impact from tax cuts, as well as sharply lower oil prices from highs last year, which have continued the roller-coaster of earnings in the energy sector.  At this point, calendar year 2019 is anticipated to experience earnings and revenue growth of 6-7% and 5-6%, respectively—albeit this early in the period, such (or any forecasts) should be taken with a grain of salt.

Foreign stocks earned positive returns, albeit to a lesser degree than domestic stocks, due to the headwind of a strong dollar for the week.  Sentiment in Europe and Japan again appeared to be driven by U.S.-China trade resolution optimism than by regional concerns, aside from core European GDP showing slower growth, notably in Germany.  However, the British pound strengthened upon Prime Minister May’s Brexit plan being voted down by parliament—which raised odds of a consensus plan with leaders of the other party, a possible delay in the implementation of Brexit itself as well as a final agreement with ‘softer’ as opposed to ‘harder’ terms.  Perhaps Brexit fatigue has set in, with most of the ‘worst case scenarios’ perhaps already having been priced in for some time.  Emerging markets rose in sympathy with developed markets and improved sentiment, particularly in Asia, while Turkey rallied dramatically due to the central bank’s decision to leave interest rates unchanged due to signs of troublesome inflation perhaps slowing.

U.S. bonds fell back by a fraction of a percent, as a partial inversion in the middle part of the curve (between the 2-year and 5-year) reverted to a flattening, while all bonds across the curve rose in yield.  Corporates fared slightly better than governments, with a positive return, and a strong rally in high yield.  However, a strong dollar turned a small nominal return for developed market bonds into a loss of nearly a percent.  USD-denominated emerging market bonds fared the best of all, with risk-taking again taking hold and shrinking spreads.

Commodities gained a few percent overall, despite the headwind of a stronger dollar, as gains in energy and industrial metals outweighed a minor decline in risk-sensitive precious metals.  Crude oil prices recovered by 4% to end the week at just over $54/barrel, upon assumptions of upcoming OPEC production cuts, per IAE reports.

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.