Economic Update 1-28-2019

• Economic data for the week was again limited by the government shutdown, and consisted of stronger house prices but weaker existing home sales, a tick down in the incomplete leading economic indicators, and sharply better and again record-breaking jobless claims.

• Global equity markets were mixed with foreign stocks outperforming U.S., with the help of a weaker dollar. Bonds gained slightly, as lower interest rates outweighed other factors, with foreign also outperforming due to currency effects. Commodities were down overall, with natural gas prices dropping sharply.

In a shortened trading week, U.S. stocks were slightly weaker as the apparent end to the government shutdown on Friday, at least for the next three weeks, seemed to boost spirits a bit. This was in absence of any substantial news about U.S.-China trade talks or progress. From a sector standpoint, real estate and technology led, with gains of over a percent upon strong earnings, while energy, staples and health care each lost over a percent on the mixed week. Earnings results have continued to come in decently, as expected, but year-over-year Q4 growth gains declining to the 11% range.

Foreign stocks outperformed domestic, with developed markets eking out small positive gains, but were outpaced by a solid week in emerging markets. Worries over trade have been balanced with continued concerns over weaker economic conditions in the core of Europe, notably contraction in German manufacturing. In fact, this was mentioned by ECB president Draghi, who alluded to the possibility for continued loose monetary conditions (which markets tend to like). In EM, optimism over solving U.S. trade issues boosted Chinese stocks, while a slight improvement in economic conditions kept the recent rally intact for Brazil, Turkey and Russia.

U.S. bonds gained a small amount of ground, as rates across the yield curve were slightly lower. Investment-grade corporates and long-term government bonds fared best, outpacing high yield. Foreign bonds fared better, earning an extra half-percent due to a weaker dollar. Emerging market bonds, both dollar-denominated and local currency, outperformed, sustaining a bounceback this year from wider spreads and terrible sentiment in late 2018.

Real estate ended the week as one of the better performers, helped by more defensive sectors such as health care in the U.S., and stronger sentiment that often accompanies a tick downward in interest rates. REITs in Europe and the U.K. gained several percent on the heels of hinted continued easy monetary policy, which would keep interest rates low and eased financing conditions, and perhaps a coming end to Brexit uncertainty, which has weighed heavily on the London office sector over the past year.

Commodities declined slightly for the week, as gains in industrial and precious metals were outweighed by weakness in energy—natural gas contracts declined by over -5% by the end of the week. After bouncing around a bit during the week, crude oil ended just slightly below where it started, at just under $54/barrel—more reports of higher supplies outweighed another bout of tensions in Venezuela as efforts to unseat current president Maduro reached a head with the leader of the legislature declaring himself as acting president amidst ongoing claims of election improprieties. The replacement interim president has been recognized by a variety of nations, including the U.S. and South American neighbors. This is one of the more extreme and volatile situations in the emerging world currently, especially meaningful in commodity markets as Venezuela possesses among the largest estimated oil reserves in the world. Intensifications of trouble here could naturally result in future crude price volatility.

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.