Weekly Economic Update

Economic Update 2-25-2019

  • Economic data for the week consisted of weaker results from durable goods orders and a key regional manufacturing index, as well as a lower existing home sales. An index of leading economic indicators was flattish, with incomplete data. However, jobless claims and homebuilder sentiment improved.
  • Global equity markets earned positive returns again, as sentiment stayed buoyant, and emerging markets leading the way. Bonds were flat, in keeping with minimal changes in interest rates. Commodities rose as the result of gains in industrial metals, natural gas and crude oil.

U.S. stocks gained a bit in a holiday-shortened week. The positive earnings report from Wal-Mart, often taken as a proxy for the strength of the U.S. consumer, boosted early sentiment, while later-week news was again focused on U.S.-China trade and a possible closer resolution as various bullet points of contention were being more closely examined, signaling a deeper stage of negotiations, with envoy visits being extended. (Over the weekend, it was announced that the March 1 tariff imposition deadline date would be extended as talks continue.) The released FOMC minutes also seemed to help, as they solidified the ‘patient’ approach for upcoming meetings.

From a sector standpoint, utilities and materials led the way with gains of several percent, and the former helped by higher commodity prices, while energy and health care lagged. The latter has been a laggard this year, to some degree due to renewed bipartisan efforts to rein in drug prices and more recently by lower earnings projections.

Earnings results for nearly 90% of the S&P 500 have now been reported, with 70% reporting a positive earnings surprise, equating to a year-over-year earnings growth rate of just over 13%, per FactSet. However, profit margins appear to have peaked in the third quarter of last year and are now back on a trend downward, expected to be at just under 11% for Q1 of 2019. This is in line with expectations for an actual Q1 earnings decline on a year-over-year basis of about -3%, due to a tough comparison in Q1 of last year. This has brought the 12-month forward P/E on the index to 16.2, which is close to historical averages following the stretch of strong recovery performance early this year. All that considered, there remains room for positive earnings growth this coming year as a whole and beyond, just not to the same degree as 2018, where tax cuts provided an unexpected boost.

Foreign developed markets generally performed in line with U.S. equities, and similar returns between Europe, the U.K. and Japan, while emerging markets outperformed by gaining several percent. China and related nations in Asia, such as Taiwan and Korea, led the way as hopes for trade resolution again appeared promising.

Bond returns were flattish, as the yield curve was little changed, except for minor declines for long treasuries, where small basis point changes can leverage into more dramatic price impact. Higher-coupon segments such as high yield and bank loans outperformed treasuries slightly. Due to a slightly weaker dollar, foreign debt outperformed U.S., in developed and emerging regions.

Real estate earned gains in line with those of broader equities, led by the cyclically-sensitive lodging/resorts segment and foreign names, while domestic healthcare lagged. For the past quarter, REITs in the U.S. came in with among the best year-over-year revenue gains of any sector, despite their typical tempered results in line with other defensive segments. Despite being sometimes confused with the challenged residential homebuilding segment (which is actually in the consumer discretionary sector), REITs holdings of higher-quality office/industrial properties, data centers, storage and other properties have the historical reputation of performing decently during periods of slow, but steady economic growth when overall supply conditions are kept in check and remain free from overbuilding booms. Interest rates staying contained have also helped, although rate increases due to a strong economy have not tended to hurt medium-term returns for REITs, contrary to popular belief, unlike the negative impact of rising rates affecting home mortgage affordability.

Commodities gained overall, with positive returns in the segments of industrial metals and energy. In addition to sharply higher prices for natural gas, which appeared to be winter weather-related, the price of West Texas crude rose by a lesser amount for the week, by 2% to just over $57/barrel. The Baker Hughes rig count was down a bit from the prior week, but remains higher by almost 70 rigs over this time last year, pointing to higher U.S. production that has kept prices in relative check, although stronger sentiment about a U.S.-China trade resolution has continued to push prices a bit higher on a shorter-term basis.

 

Period ending 2/22/2019 1 Week (%) YTD (%)
DJIA 0.59 12.02
S&P 500 0.65 11.74
Russell 2000 1.34 18.08
MSCI-EAFE 1.65 8.94
MSCI-EM 2.72 9.62
BBgBarc U.S. Aggregate 0.11 1.21

 

U.S. Treasury Yields 3 Mo. 2 Yr. 5 Yr. 10 Yr. 30 Yr.
12/31/2018 2.45 2.48 2.51 2.69 3.02
2/15/2019 2.43 2.52 2.49 2.66 3.00
2/22/2019 2.46 2.48 2.47 2.65 3.02

 

 

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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