Economic Update 4-29-2019

• Economic data for the week was highlighted by advance first quarter GDP that came in stronger than expected, solid durable goods orders and new home sales, while existing home sales and jobless claims came in a bit worse than expected.
• U.S. equity markets gained due to decent corporate earnings results, while foreign stocks were held back a bit by a stronger dollar. Bonds gained as interest rates ticked down over most of the yield curve. Commodities lost ground on average, with early gains in crude oil retreating by week’s end.

U.S. stocks ended up with gains for the week, with the S&P 500 reaching another record high, as earnings results tended to drive sector results while broader economic data was mixed. From a sector standpoint, communications services and health care gained well over 3% each to lead for the week, while energy and materials lost over a percent each.

First quarter earnings continue to roll in, with just under half of companies in the S&P 500 now having reported. While it’s no surprise that firms beat lowered expectations, three-quarters have done so, while 60% have beaten forecasts on the revenue front. The year-over-year rate of change for earnings is -2%, which is the first negative result in three years, but this was widely anticipated, and brings the forward P/E on the index to 16.8. Profit margins have been one culprit, falling to their lowest levels in a few years at just under 11%.

Along with a stronger dollar, foreign developed markets fell slightly, while emerging markets declined to a slightly greater degree. In contrast to U.S. equities, of the quarter of European stocks that have reported, under half have beaten estimates, which is worse than last quarter and below expectations thus far—but in keeping with broader weakness seen in that part of the world. Japanese stocks, on the other hand, experienced flat results in local terms, but a weaker yen turned that into a small positive. Emerging markets lost even more ground, led by China, as stronger-than-expected growth as of late heightened fears that policymakers may cut back on stimulus and stem the tide of growth.

U.S. bonds moved higher on the week, as interest rates declined across the mid- to longer-end of the treasury yield curve. Long-term treasuries and investment-grade corporates outperformed all other segments, including high yield. Foreign bonds performed similarly on a local basis, while the translation to dollars resulted in losses for both developed and emerging markets. Bonds have performed decently year-to-date, led by corporate credit as spreads have contracted, albeit to tighter (more expensive) levels akin to what we saw last fall. In more potentially problematic areas such as high yield, defaults remain contained at this point, although that is often the case until it isn’t—which can lead to investor complacency.

Real estate gained on the week in the U.S., outperforming broader equity markets, on the heels of lower interest rates. Asian REITs gained to a lesser degree, while European real estate lost ground, in keeping with weaker currency results versus the dollar.

Commodities lost ground overall, along with a stronger dollar, in all segments other than precious metals. Energy was mixed, with a 4% gain in natural gas offset by the price of crude oil falling by -1% to just above $63/barrel. Earlier in the week, prices had moved sharply higher on reports that prior U.S. government waivers of Iranian sanctions will be ending—essentially allowing Iran to produce more oil and contribute positively to global supply—which has the implication of tighter global oil markets. However, by week’s end, reports of U.S. crude inventories coming in at their highest levels in over a year reversed the initial increase.

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.