Economic Update 9-18-2019

• Economic news for the week included largely-as-expected results for the producer price index and consumer price index, while retail sales surprised to the upside, and labor metrics were mixed.
• Global equity markets gained on the week, as trade sentiment moved to optimistic once again. Bonds, however, suffered as interest rates corrected sharply higher with flows away from risk. Commodities markets were mixed, as crude oil lost ground, offsetting gains elsewhere.

U.S. stocks fared well last week, with optimism about a U.S.-China trade deal rising again. By mid-week, the Chinese published a list of products that would now be exempt from new tariffs this coming week, in addition to promoting greater purchases of U.S. agricultural products. In response, the U.S. administration deferred an upcoming tariff increase by 5% on $250 bil. in imported goods from Oct. 1 to Oct. 15. Equity results were led by small cap and value, which is a reversal of the large cap and growth tendencies we’ve become used to in recent years.

Stocks were unusually mixed by sector, with financials, materials and energy leading the way with gains over 3%, while consumer staples and technology lagged with minor losses on the week.

Foreign stocks in Europe, Japan, and emerging markets generally rose in line with domestic equities, once again driven by the sentiment tide of U.S.-China trade sentiment. The European Central Bank cut its key deposit rate by another -0.1% (further negative, from -0.4% to -0.5%) and has restarted quantitative easing measures of up to €20 bil./month, including purchases of corporate debt, beginning in November. This is smaller package than some had expected, and smaller than peak levels in 2016-17, but the shift in policy is meaningful. In fact, the question has turned to how much can be left to buy. After reaching a maximum allowable basket of sovereign government bonds, moving to corporates was the natural next step, but although this market in Europe is far smaller compared to the corporate bond market in the U.S. From a legal and practical standpoint, QE has and may become more problematic, as there are statutory limits as to the number of each nation’s bonds that can be purchased (due to this being a multi-country union) as well as the share of total bonds owned by the central bank. Japan has already encountered this issue, although it has gone further than Europe has, in buying risky assets in attempts to stimulate the economy—the BOJ now owns nearly 80% of Japanese ETF assets outstanding.

U.S. bonds experienced an atrocious week, with both treasuries and investment-grade corporates down close to -2%, as long-term yields corrected sharply higher. High yield bonds and floating rate bank loans actually gained some ground, the latter acting in their traditional fashion as a ‘contra-bond.’ Foreign bonds were mixed with developed market sovereigns declining, albeit to a lesser degree due to a weaker dollar. Emerging market bonds were sharply lower in USD terms, but local debt earned slight gains.

Real estate lost ground in the U.S., contrary to equities, hurt by the rise in long-term interest rates. However, global real estate outside of the U.S. ended slightly higher.

Commodities were mixed on net, with agriculture and industrial metals experiencing gains, while energy and precious metals lost ground for the week. While natural gas prices rose 5%, the price of crude oil fell by about -3% to just under $55/barrel, as markets absorbed an International Energy Agency report noting a global oil supply glut. However, over this past weekend, significant Saudi oil production assets representing up to half of export volumes were attacked (with early blame being cast towards the Yemenis and/or Iranians), which resulted in a 10% spike in prices first thing Monday morning. Likely more to come on that front if volatility persists.

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. 

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