Economic Update 4-08-2019

• Economic data for the week featured a decline in ISM services, retail sales and durable goods orders, while the employment situation report showed decent recovery growth from poor winter results in prior months, ISM manufacturing measures rebounded and jobless claims again reached multi-decade lows.
• U.S. equity markets gained on the week, with positive economic and labor data, as did foreign equities with the better sentiment. Bonds, however, suffered declines as long-term interest rates ticked higher. Commodities rose due to continued gains in the price of crude oil, as well as agriculture.

U.S. stocks rose for the week, with economic data coming relatively reasonable, U.S.-China trade negotiations progressing, and also the Fed seeming committed to their patient policy.

From a sector standpoint, more cyclical segments, such as materials and financials, saw the biggest gains, although there was little dispersion on the week, other than mildly negative results for the outliers of utilities and consumer staples. So far for the year-to-date, every sector is solidly positive in keeping with the ‘V-shaped’ recovery, with technology, industrials and energy leading all others, and showing gains upwards of 20%.

Earnings season for Q1 will be beginning next week, with expectations calling for the first quarterly loss in several years of around -4%. This should be put into perspective, though, as the comparisons from Q1 of 2018 were driven by a strong jump in net earnings due to the new tax cuts. Full year results in 2019, however, are still tempered, but a positive mid-single digits at this point.

Foreign stocks fared as well as U.S. equities in the developed world, with slight outperformance by emerging markets, as the little-changed dollar played a minor role. Stronger Chinese manufacturing data boosted equities there by 5%, as well as improved sentiment across a variety of export-based economies, and no other differentiators on the week. Despite the political news regarding Brexit, markets have retained their calm, although the official departure date from the EU is this coming Friday, Apr. 12. Hopes are still high for an extension until end of the June (asked for by the UK) or for another year, as the EU has proposed.

U.S. bonds fell on the week, with interest rates ticking higher along the long end of the curve, along with positive economic data. Treasuries suffered the brunt of the price impact for the week, while investment-grade corporates fared slightly better. High yield and floating rate loans fared best on the week, with positive returns. Foreign bonds fared similarly to U.S. debt, with developed market yields rising higher, and spreads tightening for emerging market debt. Spreads for emerging market bonds have re-normalized in the first quarter, moving from a ‘cheap’ over-4% level at year-end down to the mid-3’s, reflecting investor preferences again moving toward risk-taking.

As we expected, the recent partial inversion of the treasury yield curve has many strategists claiming, ‘but it’s different this time.’ This is often the problem with the qualitative assessment of economic indicators. While good news is celebrated, bad news is often excused away. We won’t know if this time is ‘different’ until after the fact. But, what we do know, is that a sustained yield curve inversion has often preceded economic slowdowns and/or recessions by a timeframe of 12-18 months historically. This wouldn’t be out of line with current estimates. However, the curve has re-normalized in a positive slope. An inversion lasting several weeks would be more indicative of historical experience as a negative indicator.

Real estate in the U.S. experienced another gain on the week, in keeping with equities, and led by cyclically-sensitive lodging/hotels and retail, while international real estate lagged with negative returns.

Commodities gained on the week, with help from energy and agriculture, while precious and industrial metals declined. The price of crude oil rose by 5% to just over $63/barrel, which appeared to be based on a combination of demand hopes from a strong jobs report, as well as supply issues from new signs of unrest in Libya, as well as continued strain in Venezuela from power outage-based production problems.

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.