Economic Update 8-12-2019

• Economic news for the week included weaker but still-positive numbers from the ISM non-manufacturing index, tempered producer prices, and a strong jobless claims report.
• U.S. equity markets declined around the world, with trade tensions again escalating early in the week, before subsiding somewhat. Bonds fared well in the aftermath of poor risk asset performance, as interest rates declined across the yield curve. Commodities were mixed, as price declines in energy offset gains in precious metals.

U.S. stocks started the week terribly, due to an apparent breakdown in U.S.-Chinese trade negotiations, and the label of ‘currency manipulator’ being applied to the Chinese, as explained above. However, there appeared to be some smoothing over of this over the course of the week, despite more back-and-forth surrounding whether or not companies will be allowed to do business with telecom giant Huawei. By Friday, stocks had recovered somewhat as conditions remained choppy.

While large caps again outperformed small caps, exacerbating the poor sentiment for the latter, sectors were mixed last week. Defensive utilities and health care led the way, interestingly followed by gains in materials stocks. The worst performers were energy, financials and communications.

Per FactSet, about 90% of companies in the S&P have now reported earnings, with three-quarters of firms beating expectations, although the year-over-year growth rate remains negative at -0.7%. Revenue growth also remains at the slowest pace in a few years at 4.7% thus far. Concerns over tariffs have taken greater precedence in company earnings calls—mostly in the industrial, consumer discretionary, and technology sectors.

Foreign stocks underperformed U.S. equities, despite the tailwind of a weaker dollar. Europe fared best, followed by Japan and emerging markets, while the U.K. lost close to -2% on the week. In the absence of other news during a typically slow August trading season in Europe, Italian officials announced that the coalition government has fallen apart and new elections could be needed. Elsewhere, German industrial output declined to a greater degree than expected, while the British economy contracted for the first time in seven years, at -0.2%. Interestingly, Chinese trade data for the prior month came in stronger than expected, with pan-Asian trade filling in the gap for the lost U.S. component, with exports up 3% year-over-year. However, Chinese equities still struggled, down several percent as ongoing trade negotiation tensions remained high. A variety of central banks cut rates more than expected, including India and New Zealand, which appeared to help equity sentiment.

U.S. bonds fared well again as interest rates continued to drift lower, along with expectations for more Fed rate cuts. Treasuries (especially the long duration variety) outperformed investment-grade corporates, which were held back by wider credit spreads. For the same reasons, high yield bonds and floating rate bank loans lost ground during the week. Along with lower rates, a slumping U.S. dollar buoyed foreign developed market debt to gains of nearly a percent, with emerging market hard currency bonds not far behind, while local EM was flat on the week. Over the past three months, despite the dollar rising over a percent, foreign debt, especially in emerging markets, has fared as well as U.S. debt.

Real estate bucked the trend of other equities, with U.S. REITs gaining up to a percent for the week, led by the defensive sectors of healthcare and storage, while malls continued to suffer. International real estate declined, albeit to a far lesser degree than broader foreign stocks last week.

Commodities were mixed to lower as lower prices for crude oil and natural gas were offset a bit by another spike in precious metals, which tend to perform well as interest rates fall to lower real yield levels. The price of crude fell by -2% on the week to about $54.50/barrel, as higher recent inventory numbers offset rumors of OPEC’s push to coordinate limited production among members to elevate prices.

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.