Economic Update 3-25-2019

• Economic news for the week centered on the U.S. Federal Reserve’s decision to leave rates unchanged, but, more importantly, revised expectations toward no further rate hikes in 2019. Manufacturing sentiment surpassed expectations, as did data for housing, jobless claims, and a composite of leading economic indicators. However, weaker data abroad appeared to outweigh these benign results.
• Global equity markets bounced around in the positive during the week before ending in the red by Friday. Due to investor risk aversion away from stocks, bond markets rallied as yields fell to lows not seen in months. Commodities gained a bit, due to slightly higher oil prices, but other segments ended the week mixed.

U.S. stocks fared decently until Friday, when poor industrial sentiment data out of Europe pulled global equities lower. Equities had rallied slightly following the dovish Fed statement mid-week, due to signs of slowness already, with investors now even more sensitive to conditions morphing into a trend of ‘too slow’. Threats to earnings for technology companies seemed to add fuel to the fire, as did the continued tumble in bond interest rates, which raises equity investor fears of ‘what am I missing?’ (as bond markets have often led equities in terms of the absorption of news).

By sector, consumer discretionary and staples fared best, with positive returns on the week, while financials were pummeled with a -5% loss—due to the lower rates and continued lack of positive slope in the yield curve needed for bank net interest margins to remain profitable.

Foreign equities struggled, albeit to a lesser degree, despite growth concerns in Europe taking the forefront—stocks there underperformed those in the U.K., and Japan, which gained. Manufacturing PMI in Europe reported its worst reading in six years, led by Germany, and moving further into contraction—which again reinforced the slowing of growth on the continent. Services, however, remained expansionary. The EU granted the U.K. an extension for Brexit, until May 22 if a withdrawal agreement can be agreed upon by Parliament next week, or only mid-April if they cannot. Political wranglings in the U.K. remain a sizable headwind to markets there, with almost too many variables to handicap, including the remaining longevity of Prime Minister May’s tenure, the possibility of a second public Brexit referendum (the movement for which appears to be growing in popularity), as well as the obvious fluid timelines for any type of workable exit agreement. Emerging markets bucked the trend a bit, by ending the week in the positive, with gains in China and peripheral Asia in keeping with Chinese economic and monetary stimulus being announced after the annual National People’s Congress meeting. A variety of emerging market central banks met last week, including Brazil, Russia, and others, with all keeping rates at status quo. A bottoming in emerging market economic data and political uncertainty (relative to Europe, anyway) seems to be increasingly aiding sentiment.

U.S. fixed income experienced a very strong week, with governments and investment-grade corporates each nearly earning 1%, and the yield on the bellwether 10-year treasury note surprisingly falling below the psychologically-important 2.5% level. Bank loans lost ground due to widening spreads and, obviously, lower rates. A little-changed dollar for the week was not an impact on foreign bonds, where developed market treasuries gained ground in line with U.S. issues, and emerging market debt was mixed.

The unusual partial U.S. treasury yield curve inversion continued, with the 10yr-3mo spread now inverted, but the 10yr-2yr isn’t (yet). However, the 30-year component remains well out of harm’s way with ample term spread over short-term debt. All of this reiterates the uncertainty markets have over recession risk and Fed policy over the next several years.

In contrast to equities, real estate fared well, with positive returns, helped by the usual boost of lower interest rates. Asian REITs also experienced gains, which offset minor declines in European real estate. The Fed moving in a dovish direction has typically resulted in a strong boost to sentiment for real estate assets in the near term, due to effects on the discount rate and borrowing costs.

Commodities gained slightly on net, with gains from agriculture and precious metals offsetting weakness in industrial metals—with the latter often tracking risk asset returns. Energy was flat on net, with a decline in natural gas prices offset by a gain of just about 1% for crude oil. Crude rose above $60/barrel during the week before settling at just over $59 by Friday. A meeting of OPEC members last week reaffirmed a near-term policy of production cuts to boost crude prices, which reinforced the tide of prices upwards, while risk aversion tempered a bit of that effect by later in the week.

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.