Economic Update 7-08-2019

• Economic data for the week was led by declines in both ISM manufacturing and non-manufacturing indexes, as well as weaker data in construction and factory orders. However, the employment situation report came in far stronger than expected, and jobless claims remain at low levels.
• US equity markets fared well last week, with improved sentiment over trade; foreign equities were also positive, but gains were pared by a strong dollar. Bonds were mixed, with credit outperforming governments as interest rates ticked slightly higher. Commodities were also flattish, with little change in the price of crude oil last week.

On a shortened trading week, U.S. stocks fared strongly, for the most part due to strong early sentiment on the heels of a partial truce in the U.S.-China trade war. Additional tariffs on hold for now, U.S. tech manufacturers can continue to supply Chinese telecom giant Huawei for now, while the Chinese have committed to purchasing greater amounts of U.S. agricultural products. However, it seems a good deal of work on a final deal is still required and the timeline remains wide open. In another market conundrum, stock prices tempered somewhat in response to a very strong employment situation report (normally good news, one would think), which implied lowered chances and magnitude of now-expected interest rate cuts by the Fed. Naturally, it’s hard to make everyone happy.

By sector, communications services, technology and consumer staples all rose well over 2% on the week to lead the way, while energy was the only sector to lose ground for the week, down -1%. Earnings expectations and actual results are likely to take precedence in coming weeks, with overall earnings for Q2 assumed to be a negative -3% year-over-year. While two back-to-back earnings decline quarters sounds severe, it happened in 2016, so it’s not all that uncommon.

Foreign stocks also earned strong returns in local currency terms, although these translated lower than those in the U.S. due in part to a 1% higher dollar, which served as a headwind. Japan fared best, followed by Europe, while emerging markets were generally flat. European equities were boosted by the U.S. China trade sentiment, and continued likelihood of ECB stimulus to spur growth. Yields fell in keeping with market approval of the potential appointment of IMF managing director Christine Lagarde as ECB president, which raises the apparent chances of a continued easy policy regime. Additionally, the EU decision to not pursue an ‘excessive deficit procedure’ against Italy following the latter’s submission of an adjusted budget, represents the removal of an additional element of uncertainty weighing down lack of cohesiveness on the continent. Emerging market members Brazil and Turkey experienced rallies, due to idiosyncratic events, including progress on problematic pension reform for the former and apparent tempering of inflation as well as improved relations with the U.S. for the former.

U.S. bonds fell back a bit, as interest rates ticked higher along the yield curve—driven mostly by the strong employment situation report on Friday. Investment-grade corporates declined to a lesser degree than treasuries, due to the yield buffer, while high yield and bank loans gained a bit of ground on the week. Developed market government bonds continued to hit new all-time lows in yield, but lost significant ground on net due to a sharply higher U.S. dollar during the week. However, emerging market USD and local debt each gained as credit spreads continued to contract.

Real estate fared even better than broader equities, continuing their strong run as of late, as lower interest rates and adequate economic growth have kept tailwinds intact. Residential and industrial/office have been the key beneficiaries, as has retail surprisingly, while regional malls have continued to struggle.

Commodities as a whole declined slightly on the week, with little differentiation between groups. Industrial and precious metals each fell by over a percent, while agriculture was little changed. While volatile natural gas prices rose nearly 5% for the week, the price of crude oil fell by over a percent to around $57.50/barrel.

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.