Economic Update 10-28-2019

• Economic data for the week included weaker readings for durable goods and consumer sentiment. Housing data points were down for the month but mixed on a longer-term standpoint, while jobless claims fell, which was a positive.
• Global equity markets generally gained on the week, with U.S. and foreign stocks performing largely in line. Fixed income returns were flat, as interest rates were again little changed from the prior week. Commodities gained due to sharp price increases for crude oil contracts.

U.S. stocks gained on the week, with corporate earnings reports coming in a bit better than expected and improved sentiment and rhetoric concerning a China trade deal. By sector, energy, tech and industrials ended with the strongest gains. Energy was helped by oil prices recovering and helping to stem long-standing negative sentiment in that sector, while industrial earnings were lackluster by Boeing and Caterpillar, but not as bad as expected. Consumer discretionary brought up the rear, with a percent decline for the week, led by a poorer-than-expected earnings report from online retailer Amazon.

Insofar as Q3 earnings details are concerned, 40% of companies in the S&P have now reported, with 80% of them beating estimates (per FactSet). However, overall growth for the year-over-year period remains negative, at -3.7%, which is slightly better than first expected, but under water nonetheless. The overall picture wouldn’t look so dire, if it weren’t for the -40% decline in earnings for the energy sector, followed by -10% for materials. On the brighter side, the more defensive sectors of utilities, real estate and health care have been in the lead, with earnings in the positive mid-single digits.

Foreign stocks fared largely in line with U.S. stocks, helped by stronger sentiment toward an end to the U.S.-China trade stalemate. The U.K. fared surprisingly well, with support in parliament for the current withdrawal agreement, but time running out, with the upcoming Brexit deadline of Oct. 31 again likely to be extended several more months (despite possible blocks from members of the EU, particularly France, which would tighten the timeframe). The ECB decided to keep interest rates unchanged, which surprised some, in Mario Draghi’s last meeting as central bank chair. European earnings also started a bit stronger than expected, which helped sustain sentiment. Manufacturing PMIs in Europe and Japan remain in contractionary territory, but appear to be flattening or improving from trough levels, which could be helping sentiment. Due to the trade impact, emerging markets fared slightly better than developed, led by commodity producers Brazil and Russia, along with stronger energy prices. A smaller EM component, Chile, suffered sharply with escalating protests/riots following a proposed increase in bus and train fares, which morphed into deeper demands for a solution to social inequality.

U.S. bonds provided returns generally flat to slightly negative, as the only change in the yield curve was a steepening on the longer end. Risk-focused assets, such as high yield and floating rate bank loans outperformed, as expected. Foreign debt was mixed, with a stronger dollar holding back developed market sovereigns, while emerging market bonds fared positively—especially local debt.

Real estate was flat to slightly negative on net, underperforming broader equity markets, with declines in healthcare offset by stronger performance in retail/malls. European REITs underperformed other regions.

Commodities rose across the board, except for agriculture, despite the headwind of a stronger dollar. The price of crude oil rose by over 5% to a shade under $57/barrel, following reports of falling U.S. rig counts, which decreases supply, in addition to optimism over a trade deal and rumblings over possible extensions of OPEC output cuts.

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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