Economic Update 7-15-2019

• Economic news for the week included a slightly stronger-than-expected consumer price inflation reading, mixed jobless claims, and slightly weaker government job openings. The minutes from the June FOMC meeting noted some economic concerns and raised expectations for possible interest rate cuts sooner than later.
• U.S. equity markets fared well in the U.S., led by a variety of sectors, outperforming foreign stocks, which largely ended in the negative for the week. Bonds lost ground globally as interest rates ticked higher. Commodities gained in almost all segments, led by energy due to oil prices rising back above $60.

U.S. stocks began the week lower, a reversal of the optimism of prior weeks concerning perceived probabilities for the Fed lowering rates at one or more of their upcoming policy meetings. Instead, concerns over the recent strong jobs report and other indicators showing more positive results point to the rate-cut story being less of a given. However, stocks improved and the Dow Jones Industrial Average and S&P 500 each reached historical milestones of 27,000 and 3,000, respectively, which have tended to be a positive from a sentiment perspective. Since the national media tends to acknowledge such things as headline news, the ‘fear of missing out’ can sometimes spur hesitant retail investors on the sidelines to reconsider and allocate towards equities.

By sector, energy recovered sharply, followed by consumer discretionary up nearly 2% for the week, while health care lost the most ground, of over a percent. The latter was affected by mixed results for various sub-sectors following the administration’s proposed plans for lowering drug prices through changes in rebates to pharmacy benefit managers. Conversely, small cap stocks lost ground again, although year-to-date results remain in competitive territory with large caps. Earnings season for Q2 begins this coming week, with some mixed results expected, and could weigh on equity sentiment in the absence of higher-level macro news, such as trade.

Foreign stocks generally lost ground across the board last week, despite the positive influence of a slightly weaker dollar. Emerging markets tended to fare better than Europe, the U.K. and Japan—which all performed similarly. Despite a greater likelihood of stimulus by the ECB, the positive of lower rates appeared to be outweighed by sparks of U.S.-European tariff tensions. Notably, France imposed a 3% digital tax on global technology companies (most of the impact being felt by firms from the U.S.).

U.S. bonds lost ground last week as interest rates ticked higher across the yield curve, with the market experiencing a bit less conviction about the Fed dramatically lowering rates in coming months. Governments and corporates in the U.S. fared similarly, while high yield and senior loans outperformed, with flattish results. Despite a weaker dollar, which tends to be a positive influence on foreign bonds especially, with today’s extremely low yields, developed market debt fared as poorly as U.S. bonds, although emerging market local bonds earned a positive return on the week.

If the environment for foreign bonds weren’t strange enough, with all-time low yields for 10-year German debt reaching -0.40%, they’ve been floating the idea of a 100-year zero-coupon bond. In recent weeks, Austria issued a similar security (locking a rate of 1.05% coming century), with German yield largely expected to be somewhere around 0.7%. This is far below the ECB inflation target of 2%, so the assumption is that the German government (not bondholders) would be paid in real terms for borrowing money over that period. Needless to say, this is very strange thing.

Commodities performed positively for the week, with gains in all major segments. Energy fared best with the price of crude oil rising by nearly 5% to just over $60/barrel. The increase was largely due to the U.S. oil inventory report showing far lower levels than anticipated, in addition to questions over whether the U.S. will extend waivers for U.S. companies to continue to operate in Venezuela—a major producer.

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.