Economic Update 11-04-2019

• Economic data during the week included the Federal Reserve lowering key interest rates by a quarter-percent for the third straight time. Insofar as data was concerned, several manufacturing metrics continued to show contraction, while housing/construction and the employment situation report for October came in stronger than expected.
• Global equity markets rose in line with the U.S. Fed lowering rates, and extension of Brexit, and lack of any negative U.S.-China trade sentiment. Bonds rallied as rates across the curve ticked downward to reflect the newly-lowered short-term rate along with tempered inflation readings. Commodities were flattish overall, despite a drop in crude oil prices over the week.

U.S. stocks fared strongly last week, with earnings results better than feared, along with an easing Fed and positive surprise from the Friday jobs report; these offset less favorable manufacturing numbers that could have played more poorly. Oddly, the week was largely devoid of any major U.S.-China trade news, other than a ‘constructive’ conference call between the two nations later in the week. Overall, the month of October ended in a very benign way, with U.S. stocks up 4%, with little of the volatility that is historically characteristic of the month.

By sector, health care rose over 3% with strong earnings results from blue chips Merck and Pfizer, while tech and industrials also fared well. Energy was the worst-performer on the week, losing ground along with oil prices.

Earnings results for Q3 continue to roll in, with nearly three-quarters of firms in the S&P having finished their reporting. In turn, about three-quarters of these firms have reported earnings numbers above projections, although the net year-over-year earnings change remains negative, at -2.7%. Revenues, however, have improved to just over 3% growth for the year. While uncommon, the index also reported three straight quarters in a row of earnings declines from late-2015 through mid-2016, so this is not unprecedented outside of weak economic environments.

Foreign stocks appeared to readily accept the EU’s extension of the Brexit negotiations for another three months, allowing several sticking points to be potentially ironed out, not to mention a general election in the U.K. in about a month. The ECB held steady with no rate changes, although it did re-commence its program of asset purchases of €20 bil./month; similarly, the Bank of Japan also held rates unchanged. Emerging markets rose to a stronger degree in local terms, with gains in most of the BRIC nations, due to an unexpectedly stronger PMI reading in China—seen as a proxy for global growth to a large extent.

Fixed income gained across the board, as the Fed’s easing of monetary policy again last week pulled down general yield levels. U.S. investment-grade bonds in both the government and corporate segments rose largely in line with each other, while high yield and senior loans each lost a bit of ground. Foreign bonds rose as well, especially developed market sovereign governments, which benefitted from the dollar falling roughly a half-percent. Now that the market yields now reflect the Fed’s third and possibly ‘final’ cut for the time being, the yield curve has again ‘un-inverted’ and resumed its normal positive slope.

Commodities experienced an uncommon flattish week, despite the tailwind of a weaker U.S. dollar. Agriculture, industrial and precious metals gained slightly, but were offset by a minor decline in energy. While the price of crude oil fell by nearly a percent to just over $56/barrel, based on fears of excess supplies, natural gas prices spiked by nearly 10%. Cooler-than-expected weather on the East coast seems to be one catalyst, in addition to speculative activity being unwound by those betting on further gas price declines.

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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