Economic Update 2-19-2019

• Economic data for the week included poor showings from retail sales and industrial production, in addition to higher jobless claims; inflation came in relatively muted on a producer and consumer basis; on the positive side, manufacturing and consumer sentiment survey data were better than expected.
• U.S. equity and developed foreign markets experienced sharp gains on the week, outperforming weaker results in emerging markets. Bonds were little changed, other than riskier debt outperforming treasuries. Commodities pushed higher on the back of a strong week in crude oil.

U.S. stocks gained on the week, led by small caps, which outperformed large caps. Markets reacted favorably to both a Congressional agreement being made to avert another federal government shutdown, as well as apparent progress, or at least willingness to make progress, on U.S.-China trade negotiations in advance of the March 1 deadline for tariffs to increase from 10% to 25% on $200 bil. of imports. At this point, it appears likely that this deadline could be pushed back, with the President mentioning he could ‘let it slide’, and a last minute effort at doing so would not be overly surprising.

All sectors generally gained for week, led by energy and materials, which performed well on higher prices for oil and other commodities, while defensives, consumer staples and utilities came in behind the others.

Foreign stocks gained, in similar sentiment to U.S. equities, with again hopes of the U.S.-China trade conflict reaching resolution. This continued to outweigh weak economic data out of Europe (with German growth for Q4 falling to 0.2%) and unchanged uncertainty over the Brexit implementation timeline. Japanese GDP, however, came in at 1.4%, as it continues to recover some several natural disasters. In emerging markets, Chinese stocks gained on optimism following the Lunar New Year and hopes for trade progress, while Indian stocks declined sharply following a terrorist attack in disputed Kashmir soured sentiment upon worries over stability in the region.

U.S. bonds were flat on net, with little change in interest rates across the treasury yield curve. High yield and bank loans outperformed, in keeping with greater appetite for risk along with equities. A stronger U.S. dollar hampered returns for foreign developed market bonds, which ended negative, while risk-taking in emerging markets was rewarded due to tighter yield spreads.

Commodities gained sharply on the week, led by energy, as all other segments were little changed, other than industrial metals, which lost a few percent. The price of crude oil spiked by over 6% on the week to a few cents under $56/barrel. The catalysts appeared to be tighter global inventories, caused by Saudi Arabia pulling back on production of nearly a million barrels/day, coupled with progress in the U.S.-China trade talks, which at first wouldn’t seem related, but lower the probabilities of substantially weaker global growth, serving to potentially sustain global demand.

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.