Economic Update 9-23-2019

• Economic data for the week was highlighted by the Federal Reserve lowering short-term interest rates by another quarter-point, in line with financial market expectations. Otherwise, industrial production and housing sales came in stronger than expected, several regional manufacturing indexes declined but remained expansionary, while the index of leading economic indicators was little changed.
• Equity markets lost ground last week moderately, both in the U.S. and abroad. Bonds fared better, with positive returns in keeping with the Fed’s lowering of interest rates. Commodities rose due to a spike in crude oil prices on the heels of an attack on Saudi oil facilities, threatening near-term supplies.

U.S. stocks ended lower last week, although with an absence of volatility in geopolitics (other than the Saudi oil attack, which was largely ignored by markets) and markedly little news on the U.S.-China trade front, which has been driving sentiment in both directions for months. By sector, defensive groups utilities and healthcare outperformed, along with energy due to higher oil prices; conversely, consumer discretionary and industrial stocks lagged for the week, with the latter presumably more affected by higher energy prices.

Foreign stocks performed generally in line with domestic equities, with the exception of emerging markets, which lagged other groups slightly. Hopes for a UK-EU Brexit deal continue to persist, although odds of a deal or ‘no deal’ outcome in coming weeks continue to appear as even odds, with the Irish backstop remaining a sticking point. The Bank of England left interest rates on hold, regardless, with offsetting risks from the economy and weaker currency factors. EM results were led by weakness in China, Turkey and South Africa. In China, several economic indicators, such as industrial production and retail sales, pointed to damage from the current trade spat, which has undermined sentiment. While oil importers generally suffered, this was offset by positivity in oil-exporting nations Russia and Mexico, which would benefit from price spikes.

U.S. bonds gained ground on the week as interest rates dipped back to lower levels across the curve, in keeping with both sentiment away from risky assets and the Fed’s quarter-percent rate cut. Investment-grade corporates fared best for the week, with long-term treasuries faring best, while high yield and senior loans lagged. A stronger dollar held foreign developed bonds back, with minimal gains, while emerging market bonds were again mixed—USD-denominated gaining nearly 2%, while local debt was flat.

Real estate bucked general equity trends, but kept pace with defensive sectors, by gaining over a percent on the week. Foreign real estate positions provided similar returns to those in the U.S., with gains in Europe offset by losses in Asia.

Commodity indexes rose broadly, due to the overwhelmingly positive influence of energy, as agriculture was little changed, industrial metals lost a bit, and precious metals gained slightly. As discussed earlier, the price of crude oil spiked early in the week, following the Saudi attack, while optimistic expectations for getting facilities back on online (by possibly month-end) resulted in a price reversal downward. On net, the price of crude oil rose by 6% to just over $58/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. 

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