Economic Update 4-01-2019

• Economic news for the week included a downward revision to last quarter’s economic growth in the U.S., mixed housing results, manufacturing sentiment and consumer sentiment, but a stronger trade balance.
• U.S. equity markets gained ground last week, while foreign stocks declined a bit, after being negatively affected by a stronger dollar. U.S. bonds rose for another week, with slower global growth pulling down interest rates and future expectations for yields generally. Commodities were mixed, with oil prices creeping upward slightly.

U.S. stocks gained on the week, with little of substance other than apparent continued progress on U.S.-China trade talks and what seems to be some degree of perverse glee about slowing economic conditions (which would keep interest rates contained). By sector, cyclical industrials and materials led the way, with gains over 2% on the week, helped by a rebound in Boeing following announced improvements in their troubled 737 Max airplane. Utilities and communications services lagged with minor declines, as the latter was held back by rumors of increased regulatory scrutiny of the proposed T-Mobile/Sprint combination.

Foreign stocks gained a bit in local terms, but a stronger dollar converted these gains into losses. Sentiment seemed affected by a variety of forces, primarily being another vote down of Brexit (despite PM May’s promises to depart afterward if it went forward), as well as ECB pledges to take continued action in order to stem weakened growth. Emerging markets and China appear to be driven by a continued inching towards a U.S.-China trade deal, which, although the timeline is uncertain and haggling over final details remains, the market appears to have priced in a successful conclusion. Otherwise, optimism over upcoming elections in India has been offset by further volatility in Turkey, where political pressure to strengthen the lira before elections over the weekend again led to concerns over central bank independence.

U.S. bonds fared well again last week, as interest rates continued to temper in line with perceived Federal Reserve dovishness and concerns over slowness in global economic activity. Corporate credit outperformed governments, with both high yield and floating rate loans gaining nearly a percent for the week. A stronger U.S. dollar created a mixed environment for foreign debt, with developed market treasuries losing ground, and mixed results for emerging market—with USD bonds rising and local debt declining. Along with the lower long-term rates for bonds in the U.S., 10-year bond rates in both Germany and Japan have again moved below zero, reflecting their pessimistic outlooks. The U.S. yield curve is no longer inverted, with shorter-term rates, at least at the 2-year end, falling further below the 10-year with lessened concerns over the Fed raising rates this year.

Real estate fared well last week, with results in keeping with equity markets, and again aided by lower interest rates. Asian REITs also gained, but foreign real estate overall was held back by weakness in Europe.

Commodity markets were mixed on the week, with energy and industrial metals gaining ground, along with other risk assets, while precious metals and agriculture declined on the week, more in keeping with the stronger dollar. Offsetting the -4% drop in natural gas, the price of crude oil rose by 2%, or about $1/barrel to just over $60. Tighter supplies by OPEC appear to be the primary culprit, in addition to reports that U.S. shale has been rejected by some Asian refiners due to residual contaminants (shale is a lot ‘dirtier’ than conventional light crude, so requires much more refining to get it into usable form). Oil prices generally have experienced their strongest quarter in about a decade, similar to other risk assets such as equities.

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.