Economic Update 3-11-2019

• Economic data for the week, with a delayed schedule still affected by the government shutdown, showed positive results for ISM non-manufacturing/services and housing, coupled with a lackluster February employment report, which looked to have strongly negative winter weather effects.
• Equity markets declined by several percent globally, due to concerns over world growth, with a stronger U.S. dollar punishing local returns a bit more for foreign stock markets. In fixed income, safe haven U.S. government bonds gained ground, while high yield struggled. Commodities were little changed, in keeping with a rare calm week for crude oil prices.

U.S. stocks fell back by several percent, as worries were again focused on perceived weakening in the global economy, particularly through policy actions in Europe and China to stimulate growth. Small caps fared worse, down over -4%.

From a sector standpoint, the only positive sector for the week was utilities, with a small gain, while energy and health care experienced the sharpest losses, at nearly -4%, due to a leveling in oil prices for the former and individual company results in the latter.

Foreign stocks were down in similar terms, as slightly stronger local currency results were dampened by the U.S. dollar, which gained about a percent on the week. Last week’s ECB meeting ended in a lowered estimate for European economic growth to just above 1% for the year, as well as the decision to further enhanced eurozone banking system liquidity, in efforts to stimulate economic activity broadly through greater lending. This was in addition to comments stating that rates would be kept unchanged through at least the end of the year—a somewhat unusual (and long) pledge, but another example of the tool of ‘forward guidance’, which has become more popular among the world’s central banks.

Emerging markets were led by strength in China, where the annual NPC government meeting resulted in several policy measures intended to stimulate growth during a stretch of recent slowing, including infrastructure spending and lower taxes in certain segments. Other regions came in a weaker by several percent, including South Korea, which tends to be affected by changes in North Korean rhetoric, and Mexico, which was downgraded slightly by S&P, as were several key companies in the country, due to perceived substantial open-ended payments likely needed in coming years to support state-owned energy firm Pemex, which is heavily indebted.

With the deadline of March 29 looming for U.K. policymakers to finalize some type of orderly ‘Brexit’ plan, it appears a few older plans may dusted off and revisited. The coming week will feature several potential votes on the issue, the first being on Mar. 12, with possible subsequent votes dependent on the outcome of the first. It appears that either PM May’s plan will be put through, with special care taken to address the Ireland/Northern Ireland issue, or an extension could be requested that would give Parliament more time for other options. While an exit without a deal (‘Hard Brexit’) is possible at month’s end, it doesn’t seem as likely at this time, and a new referendum seems even more remote. Obviously, this uncertainty has served to depress the value of the U.K. pound, as well as U.K. equities broadly.

U.S. bonds fared well last week, gaining upwards of a percent, in keeping with flows away from equities and other risk assets. Treasuries fared a bit better than credit, due to wider spreads, while high yield bonds and bank loans ended up losing ground. Similarly strong results for foreign developed market debt were largely reversed to flat by a strong dollar.

Interestingly, the yield curve flatness has again become even more pronounced with rates from the 3-month T-bill, all the way out to 5 years, are within a few basis points of each other, and in fact, are slightly inverted. The 10-year treasury, though remains positively sloped by a mere 15 basis points over the T-bill, while the 30-year treasury remains even more positively sloped (and even offers a 1% real yield, if basing things off of the Fed’s target inflation level). In historical terms, this is considered very flat.

Real estate gained slightly on the week, led by gains in residential, substantially outperforming the broader equity market, which lost ground. Foreign REITs performed similarly flattish, despite the headwind of the stronger dollar.

Commodities experienced a flattish week, with larger losses in agriculture and industrial metals offset by smaller gains in energy. The price of crude oil inched up by about a half-percent to just over $56/barrel.

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.