Economic Update 5-06-2019

• Economic data for the week was characterized by a Federal Reserve meeting where policy was left unchanged. Positive data included a very strong employment situation report, and gains in consumer confidence, while the ISM services index tempered, but remained expansionary. On the negative side, the ISM manufacturing index and regional manufacturing data came in below expectations.
• U.S. and foreign equity markets both gained slightly on the week, despite mixed growth and policy news. Bonds were flat to slightly negative, as interest rates ticked just a bit higher. Commodities lost ground, led by lower prices for crude oil due to concerns over a near-term supply glut.

U.S. stocks gained slightly on net, while small caps were up by well over a percent. By sector, financials, health care and industrials gained over a percent, while energy lagged the pack with a -3% decline, in keeping with weaker oil prices. It was one of the heaviest reporting weeks for Q1 earnings, with nearly 80% now having reported for the S&P, and the year-over-year decline now being trimmed to below -1%, mostly due to recent improvements in the health care sector. Corporate earnings, however, have become more bifurcated, with increased volatility for firms beating or missing their estimates resulting in wider price moves.

It was an interesting week from a sentiment standpoint for a variety of reasons. On a macro level, markets appeared a bit confused by the FOMC statement and subsequent Powell press conference. It appeared that a more dovish stance was hoped for—in keeping with a rising probability of a fed funds rate cut, as implied by futures markets—while Powell was more resolute in entrenching the ‘patient’ current policy, noting economic growth as solid, and dismissing currently low inflation as a temporary condition. The jobs report offered another mixed bag, with strong results naturally pointing to healthy labor markets and implying decent economic growth; while, at the same time, results that are ‘too good’ will put additional pressure back on possible continuation of Fed rate hikes. Time will tell, but this could be another sentiment inflection point.

Foreign stocks in both developed and emerging markets on net gained to a similar minor degree, in keeping with U.S. stocks. While there were some continued signs of continued tempering growth in Europe, notably in sentiment and industrial data, Q1 GDP came in 0.4% higher, which was stronger than the prior Q4 pace of 0.2%. The Bank of England held off on raising rates, due to ongoing uncertainty over Brexit, however, noted a continued need to pick up the pace due to embedded domestic inflation (partially as a result of a weaker British pound/stronger U.S. dollar). This makes England a bit of an outlier in the world in sticking with more hawkish sentiment. Japanese stock markets were closed for the week in acknowledgement of a new emperor being installed (ceremonial only). Emerging markets performed on par with developed, with continued hopes in China of a U.S. trade deal, although a few key components still appear to be in the process of negotiation.

U.S. bonds were down just a few basis points on the week, as interest rates ticked slightly higher on the Fed’s lack of ‘dovishness’ on top of Friday’s strong employment numbers. Treasuries and high yield were equally flat, while investment-grade corporates lagged and floating rate bank loans gained along with higher rate sentiment. Foreign bonds were helped by the weaker dollar, with slight gains in developed markets and larger gains in emerging markets.

Commodities were generally down on the week across the board, to varying degrees, despite a weaker dollar. Industrial metals were the worst-performing segment, followed by crude oil, which fell in price by -2% to just under $62/barrel. Fears of a supply crunch following the planned expiration of waivers of Iranian exports sanctions were offset by far-stronger than expected U.S. inventories.

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.