Economic Update 6-10-2019

• Economic data for the week included positive results in ISM non-manufacturing, while ISM manufacturing lost a bit of ground for the prior month. The employment situation report for May also came in weaker than expectations.
• U.S. and foreign equity markets recovered sharply last week, with hopes of the Fed lowering interest rates in response to growing economic headwinds. Bonds also fared positively, as rates declined across the yield curve. Commodities were mixed, with oil prices recovering slightly.

U.S. stocks recovered last week, ending a forgettable month of May with its best week of 2019 so far. By sector, cyclically-sensitive materials recovered by nearly 10% for the single week, followed by technology, while communications and defensive utilities brought up the rear—but remained positive.

Technology stocks experienced early weakness due to the House Judiciary Committee announcing an anti-trust review of several tech companies, along with the DOJ and FTC, although market sentiment seemed to look past these isues over subsequent days. This shift was entirely due to hints of possible Fed easing this year, which outshined all other concerns and pushed sentiment positive. (This was driven by FOMC member comments, which could have been taken out of context, as ‘rate cuts’ were not specifically mentioned, only a reiteration of monetary actions ‘as appropriate’ to support the economy, which is their mandate anyway.) Keeping interest rates low naturally lowers the cost of borrowing for companies and governments, while also reducing the discount rate for risk assets—elevating their fundamental fair values.

Foreign stocks again largely performed nearly in line with U.S equities, helped by a weaker U.S. dollar. European stocks were also buoyed by comments from the ECB that put any interest rate increases on hold by at least six months, as well as signaled a new series of financial stimulus to help spur loan growth. This was in response to continued uncertainty regarding global trade, sluggish European growth and a backdrop of tensions surrounding Italy’s larger-than-allowed deficit. Japan lagged Europe and the U.K. by a bit, during a week where the World Bank cut forecasts slightly to 0.8% for 2019. Australia also lowered its key interest rate by a quarter-percent to 1.25%, in order to sustain its ongoing expansion. Emerging markets lagged due to lower prices in China, related to perceived slower economic growth due to trade, and retaliatory measures, while other regions were widely divergent.

U.S. bonds fared positively, with interest rates declining, as a result of the earlier-mentioned Fed comments, which markets took as lowering the bar for stimulus actions this year. Governments and corporates in the U.S. performed largely in line, while high yield outperformed along with risk assets. Foreign developed and emerging market bonds performed similarly in local terms, but a weaker dollar boosted returns by over a percent.

Commodities were mixed on the week, with precious metals and energy higher, while industrial metals lost ground. The price of crude oil gained roughly a percent to just a penny under $54/barrel, with sentiment continuing to be split between higher U.S. supplies and fears of global demand decline. As an indication of crude’s recent volatility, despite a double-digit decline in May, prices remain up nearly 20% year-to-date, while down almost -20% on a trailing one-year basis.

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.