Economic Update 4-22-2019
- Economic data for the week included stronger-than-expected retail sales, jobless claims and a tighter trade deficit, several regional manufacturing indexes showed mixed results, while housing starts again struggled.
- In a shortened week, U.S. equity markets were mixed, while foreign stocks gained slightly. Bonds were generally flat with little change in underlying interest rates. Commodities fell slightly, with a minimal rise in crude oil offset by declines in other sectors.
In a low-volume week shortened by the Good Friday holiday, U.S. stocks were mixed, with mega-caps gaining, while small caps lost a bit of ground. In fact, the VIX volatility measure reached an eight-month low during the week, with little headline news to move the needle in either direction as of late. Equity sentiment may have also been negatively impacted by continued Presidential criticism of the Fed, despite its more recent dovish stance, based on broader growth concerns.
By sector, industrials and information technology led with gains over a percent for the week, with the former being led by strong earnings results of several higher-profile components. However, healthcare lost over -4% to lead the pack significantly.
The weakness in healthcare as of late has been tied to intensifying pre-2020 election political rhetoric along the lines of enhanced Medicare (including a version covering everyone), or even moves toward a single-payer system. This has been spurred by grass-roots dissatisfaction with high prescription drug costs and lack of pricing transparency in other aspects of medical care, which, if reform were to be implemented, raises a cloud of uncertainty over future business conditions for insurers, benefit managers and even drug and device makers.
Earnings results for Q1 have been slowly rolling in. Per FactSet, with only 15% of S&P firms reporting, the earnings growth rate is a negative -4%. While early, if this pace keeps up, it will be the first year-over-year decline in earnings in about three years, although revenue is expected to grow at a similar 5% rate to recent quarters. Ironically, healthcare is expected to be one of the few growing sectors for the periods. For the entirely of 2019, earnings growth is expected to revert back to the mid-3% range, with revenue in the upper-4% area. Interestingly, while obviously early, estimates for 2020 earnings growth are currently in the 11-12% range, far from the recessionary number some are expecting.
Foreign stocks fared better in local terms, with similar results for developed and emerging markets, but a stronger U.S. dollar pared these back to far smaller gains. The extension for Brexit has provided a bit of a near-term respite for uncertainty, while earnings growth so far has come in a bit better than the far lowered expectations in Europe, perpetuated by manufacturing numbers in Germany and France that continue showing contraction. A recent shift in the U.S. administration’s tariff focus from China to Europe hasn’t helped matters from a sentiment perspective. However, based on the opinions of some strategists, the negativity could be excessive, based on the outperformance of the services segment of the economy relative to manufacturing.
U.S. bonds experienced minimal, but positive change across the board, in governments, investment-grade corporates and high yield—as the yield curve moved only by a few basis points in a handful of maturities. Foreign developed market bonds lost a small amount of ground in local terms, which translated into losses of up to a half-percent due to strength in the dollar. Emerging market bonds were similarly mixed, with USD-denominated faring better than local.
Real estate assets declined several percent on the week in the U.S., while foreign REITs in Asia and Europe suffered fewer losses, despite the negative dollar influence.
Commodities lost a bit of ground over the week, in keeping with a stronger dollar. Although energy was surprisingly flat, declines in agriculture, precious metals and industrial metals helped bring down most indexes. The price of crude oil was minimally changed, ending at a bit over $64/barrel, while natural gas fell by -6%, due to high levels of output and warming spring temperatures.
|Period ending 4/18/2019||1 Week (%)||YTD (%)|
|BBgBarc U.S. Aggregate||0.06||2.58|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
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.