Economic Update 8-26-2019

• In a lighter week for economic news, the index of leading economic indicators reversed course and showed a monthly gain—lowering odds of an upcoming recession. Other positive news included existing home sales coming in better than expected, while new home sales declined, but largely due to positive revisions from the prior month.
• U.S. equity markets lost ground worldwide as trade tensions continued to vacillate, while foreign stocks fared slightly better. Bonds were flat to higher as interest rates changed minimally on the week. Commodities lost ground, primarily in the agricultural and industrial metals segments, while precious metals fared well.

U.S. stocks lost ground for the fourth week in a row. Early in the week, while long-term treatment of trade and supply chain linkages with Chinese telecom firm Huawei remain in flux, the temporary license issued by the U.S. Dept. of Commerce to allow U.S. companies to trade with the firm was extended for another 90 days, which removed a key piece of technology-related uncertainty. Despite the administration’s preference to move away from any type of cooperation with Huawei, which is deemed a national security and intellectual property transfer risk, they’re currently one of the few global firms taking the lead in new 5G technology. China also announced retaliatory tariffs later in the week, on goods totaling $75 bil., including a 25% tax on U.S. autos, in response to coming U.S. tariffs in Sept. and Dec. By Friday, President Trump’s order to U.S. companies to begin looking for ‘alternatives to China’ sent stocks lower by -3%, with a large degree of uncertainty over what that actually meant and what measures it would take to achieve it.

Eyes turned to Jackson Hole, WY, where the annual Fed symposium consisted of research presentations by various academics, discussions of policy options and a keynote from Chair Powell, which is usually closely watched for clues for policy clarifications. He described the current geopolitical environment as complex and turbulent, featuring ‘significant risk.’ However, he was also ambiguous as to whether or not such uncertainty warranted further rate cuts or the degree of any decided-upon further cuts, since the FOMC membership seems split on the issue. On one hand, this sounds disconcerting for investors trying to get a handle on policy direction, but also reflects that the decently-humming economy may not warrant drastic action.

By sector, utilities and consumer discretionary were the only groups with a positive return for the week, unique for the latter, which tends to be ‘higher-beta,’ but was boosted by stronger-than-expected earnings for large index constituents Target, Home Depot and Lowe’s. The more cyclical areas of materials, financials, and energy suffered most, along with healthcare.

Foreign developed market stocks fared better than domestic issues, helped by a weaker dollar, which provided several tenths of a percent of return. The Eurozone and U.K. were little changed in local terms, helped by expectations for more quantitative easing in the EU and some apparent progress made between the U.K. and European officials regarding Brexit. A stronger-than-expected GDP report in Japan appeared to help returns there. Emerging markets stocks on net fell in line with developed in local terms, but weaker currency impact pulled returns down slightly. The key outlier was a decline in Brazil, affected by political sentiment, fires in the Amazon, and proximity to problematic Argentina, which lost further ground last week. Chinese stocks, on the other hand, gained several percent due to stronger earnings and additional central bank easing measures.

U.S. bond indexes gained slightly, despite the decline in equities. With treasuries ending the week flattish, corporates of all types—investment-grade, high yield and bank loans—all gained. Despite a stronger dollar, foreign bonds all lost ground, with emerging market local debt faring the worst at nearly -1%. Interestingly, Italian debt ended the week with a 10-year yield at around 1.3%, as the prime minister resigned, a half-percent lower than a week ago.

Real estate declined by about a percent, in keeping with broader equities, and bucking the trend of recent stronger and less-correlated performance relative to other risk assets. The weaker dollar helped foreign REITs earn positive returns, however.

Commodities generally fell last week, despite a weaker dollar, which usually acts as an upward catalyst. The drop was led by weak pricing for agricultural contracts (with crop yields expected to be stronger than expected) and industrial metals (due to ongoing trade issues). The uncertainty continued to benefit precious metals, which gained a percent on the week. The price of crude oil fell by roughly a percent to just over $54/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.