Economic Update 2-04-2019
- Economic data for the week included no change in the Federal Reserve’s policy interest rate, and more mixed results from housing, while positive results originated from ISM manufacturing data and labor markets, particularly the employment situation for January.
- U.S. equity markets gained for the week, with foreign equities just behind. Bonds eked out a minor gain as interest rates declined along the yield curve. Commodities rose a bit upon a further recovery in crude oil prices.
U.S. stocks rose last week on the heels of a more ‘dovish’-than-expected Fed, decent economic data and earnings results. Mid-week, stocks spiked in response to the dovish Fed language that was hoped for, but not entirely expected, in terms of an acknowledgment of global economic slowing. The fear was that the Fed would steamroll through their process of raising rates as initially planned without regard for extraneous factors; however, careful language assuaged markets.
By sector, several sectors ended at or near gains of 3%, including energy and communications services, based on earnings results (the latter led by those from Facebook); financials and consumer discretionary brought up the rear with barely-positive gains (the latter of that group led by Amazon).
Last week was the most substantial in terms of Q4 S&P earnings releases, with over a third of the index reporting. Nearly half of reporting is now in, with 70% of firms surprising on the upside (not abnormal, due to the usual quarterly tendency of firms to keep forecasts on the conservative side). The earnings growth rate for the quarter was just over 12%, in line with estimates. By sector, results were led by far better than expected earnings (over 95% growth) from the energy sector, based on oil revenues from earlier in the year, while most other groups performed in a far tighter range of 5-15% growth; the sole exception was utilities, which experienced negative growth due to a handful of company-specific factors. Revenues have grown in the mid-6% range for the quarter. Overall, this has brought the forward-looking price/earnings valuation of the S&P to 15.7x—fairly close to long-term averages. However, for Q1 2019, a decline in earnings year-over-year is expected, while full year 2019 results are anticipated to fall in the 5-6% range. As expected, growth across the board has decelerated from far stronger levels earlier in 2018.
Foreign stocks also saw gains for the week, albeit to a lesser degree than in the U.S. European and Japanese stocks generally rose in line with domestic equities, while those in the U.K. rose several percent along with discussion of potentially additional negotiations with the EU on key points of Brexit, including the critical (on several levels) item of the Ireland-Northern Ireland border. Italy, however, declined as it was reported that their economy slipped into recession in Q4, the second straight (slightly) negative economic growth quarter; Europe overall has been growing at its weakest pace in several years. Again, emerging markets outperformed domestic markets, led by Chinese and peripheral Asian stocks, with a rising tide of hope that a trade deal with the U.S. will soon be worked out.
U.S. bonds ticked higher slightly, as rates generally fell across the intermediate- to longer-part of the yield curve. Investment-grade corporates outperformed governments and high yield slightly, while high yield and bank loans hold the lead year-to-date with strong recoveries from the depths of December (helped by decent earnings performance from the energy sector). The week ended with another interesting minor inversion between the 1 year and 5 year treasury rates, before turning positively sloped again beyond the 5 year. What does this mean? Consensus is calling for a slowdown in rate hikes or even a possible recession over the next few years (to no surprise for anyone reading headlines over the past few months). However, these are never obvious, and can reverse, so minor inversions like this could either correct themselves or turn into a full yield curve inversion, which would be much more telling as a signal, based on historical precedent.
Foreign bonds in developed markets rose in keeping with domestic bonds, but were outgained by another recovery week in emerging market debt for the week, as well as year-to-date, for both local-currency and dollar-denominated bonds.
Real estate fared especially well last week, with gains in the low single-digits, thanks to decent economic reports coupled with a more dovish Fed, that would keep interest rates contained—this type of environment has tended to be a ‘sweet spot’ for real estate investments. Foreign REITs fared just a bit behind U.S. real estate.
Commodities gained on the week, as higher prices for precious metals and crude oil offset a -10% drop in natural gas, following changes in inventory expectations and extreme winter weather letting up somewhat. The price of crude oil ticked up again by about 3% to just over $55/barrel as economic prospects improved, the number of rigs in operation declined, and uncertainty continued in Venezuela due to just-imposed U.S. sanctions on exports.
|Period ending 2/1/2019||1 Week (%)||YTD (%)|
|BBgBarc U.S. Aggregate||0.53||0.81|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
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.