Economic Update 5-20-2019

• Economic data for the week included weakness in retail sales and industrial production, while several regional manufacturing surveys, jobless claims, consumer sentiment, and housing stats came in stronger than expected.
• Equity markets in the U.S. and in emerging markets ended the week with declines, while developed foreign regions gained slightly on net. On the other hand, bonds and real estate fared decently as interest rates declined. Commodities gained, despite the stronger dollar, due to agriculture and energy affected by sector-specific factors, such as weather and geopolitics.

U.S. stocks began the week with an ugly Monday, in a continuation of last week—due to continued aftereffects of the U.S.-Chinese trade situation seemingly breaking down. However, conditions quickly improved a bit during the week, as earlier rumors (and later confirmation) of a postponement of a decision for up to six months about implementing widespread auto tariffs, which somewhat lowers the chances of their implementation. This affects the EU and Japan, more than other regions. By the end of the week, the White House removed steel import tariffs on Canada and Mexico, seen as a positive, but imposed a ban on trade with Chinese telecom firm Huawei, which could disrupt supply chains for technology manufacturers.

Traditionally defensive utilities and consumer staples ended the week as the only sectors earning positive returns, helped by a strong earnings results from Walmart, while financials and industrial suffered the most severe damage—each down around -2% for the week.

Foreign stocks in developed markets fared better than U.S. equities, gaining a percent in local terms, despite a stronger U.S. dollar pulling these lower. Emerging markets fared worse, with continuations of trade concerns due to the ramped up U.S.-China rhetoric. While Brazil fared worst, down about -5%, the Far East group was similarly punished due to embedded trade linkages with China.

U.S. bonds fared well during the week, as interest rates declined by several basis points across the treasury yield curve, which remained partially in inversion for the near-term maturities. This is in spite of rumors claiming the Chinese sold a multi-year high number of Treasuries. Governments outperformed investment-grade corporates slightly, as spreads widened. More severely, this affected high yield bonds, which lost ground during the week. A stronger dollar offset flight-to-quality impacts in developed market government bonds, which ended flat, while emerging market debt ended in the negative—affected by widening risk spreads.

Real estate, in contrast to broader equities, gained ground during the week, proving their value as a portfolio diversifier yet again. Foreign REITs, however, lost ground a bit, albeit to a lesser degree than broader foreign equities.

Commodities generally gained on the week, despite the typical headwind of a stronger U.S. dollar, with gains of nearly 5% in the agricultural space (led by strength in both wheat and corn, led by threats of crop disease and concerns over storms and delayed wet planting conditions), followed by a general rise in energy. The price of crude oil ticked up by nearly 2% to just under $63/barrel, a tempered pace despite enhanced confrontational rhetoric with Iran.

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.