Economic Update 11-11-2019

• In a light week for economic data, ISM non-manufacturing sentiment strengthened beyond expectations, while labor data was mixed, but remained generally positive.
• Global equity markets rose in value during the week, with slightly better-than-expected economic results and again high hopes for an early phase trade deal. Bonds experienced a rougher week with negative returns, as rates ticked higher along with stronger growth expectations. Commodities were mixed, but generally higher, led by stronger prices for crude oil and natural gas in the energy sector.

U.S. stocks generally fared well during the week with discussions about rolling back some tariffs as a part of the proposed ‘phase 1’ trade deal, as quoted by an administration official. This included the likely continuation of a waiver for communications and tech firms for associations with controversial Chinese telecom Huawei Technologies. Several stock indexes, including the Dow, S&P and Nasdaq all moved into record territory yet again. As has been the case over much of the past year, market sentiment has wavered back and forth (almost by the hour) based on rumors of various deal components.

It is difficult to assess the level of trade deal impact that have been baked into equity prices at this point. Although, it appears that the probability of ‘some’ deal in a final form is in the base case for many prognosticators, as opposed to the complete breakdown of talk, although that remains in the realm of possible outcomes. The lower likelihood is due to the political will for continued economic expansion at least through the 2020 election period, as we’ve discussed previously.

By sector, results have been increasingly divergent and based on various earnings results in recent weeks. However, last week, all segments gained ground, led by financials, industrials and energy. Utilities lost the most ground, down nearly -4% as rich valuations were coupled with rising interest rates and investor preferences for risk. Real estate also lagged, due to flows away from higher-yielding defensive assets.

Foreign developed market stocks fared similarly to U.S. names in local terms, while lagging a bit when translated for a stronger dollar. European firms have fared decently, with lower valuations already in a world starved for cheaper assets, and a ratio of roughly half of firms beating their earnings estimates for the past quarter (trailing the roughly three-quarters in the U.S. that have done so, per FactSet). The recent focus now has been on the German economy, which is export-heavy, and thus a gauge of the direct impact of slowing global economic growth and trade tensions. It’s bordering on recession, with negative GDP growth and a pervasive contractionary manufacturing ISM. Emerging markets fared a bit better, with less of a currency impact. Gains in China and other Asian nations were fueled by stronger-than-expected Chinese economic data, but also improved trade deal hopes. Brazil struggled due to weakness in the real, stemming from offshore oil drilling rights auctions that brought less interest than anticipated.

U.S. bonds pulled back significantly for the week, along the lines of -1% or more for broader indexes. Higher yields came with hopes of a trade deal, and supposed positive impact on economic growth. In fact, the 10-year treasury reached over 1.9%, the highest rate since early summer. Bank loans, however, benefitted from the path upward in rates, ending as the only segment with significant gains for the week. Foreign bonds suffered a similar fate, exacerbated in developed markets by a stronger dollar, which pushed index results down over -2%. Emerging market debt fared slightly better, but still ended the week with losses.

Commodities were again mixed, with a stronger dollar serving as a headwind. While industrial metals were unchanged, agriculture lost ground, as did precious metals, along with a stronger risk appetite in financial markets. Energy gained, helped by continued increases in natural gas, due to expected colder weather in coming weeks, in addition to the price of crude oil gaining nearly 2% just over $57/barrel. From a broader level, reports continue to surface showing supply growth in a number of countries for next year, such as Norway and Brazil; at the same time, risks of a global demand slump persist. The combination of those two factors are generally negative for oil price prospects, absent any policy activity by OPEC to continue to contain production and keep prices within an acceptable range.

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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