Economic Update 12-09-2019

• Economic data for the week included a sharply better than expected employment report for November, as well as stronger consumer sentiment, yet weaker readings for both ISM manufacturing and services data, although the latter survey remained in expansion.
• U.S. and foreign equity markets both gained, as trade optimism and economic results outweighed early pessimism. Likewise, interest rates rose, which punished government bonds but rewarded credit. Commodities gained as OPEC production cuts buoyed crude oil prices sharply last week.

Equities were mixed to slightly positive last week, as due to conflicting sentiment. Early in the week, U.S. stocks weakened due to Presidential comments that a trade deal might not be struck until next year or even after the election, which disappointed those wanting a deal before year-end. Mid-week, however, hopes had turned more optimistic, with talks described as going ‘very well’, and a positive jobs report on Friday certainly turned sentiment around. From a sector standpoint, energy and consumer staples led, with gains of a percent or more, while industrials and consumer discretionary stocks suffered with losses of a similar magnitude, with weakness in several transportation names.

There were also rumblings about tariffs being placed steel and aluminum from Brazil and Argentina, due to extreme currency devaluations in those nations, as well as continued complaints about aircraft part subsidies in Europe. Additionally, tariffs were implemented on just over $2 bil. on specialty French products, such as wine, cheese and handbags, in response to digital taxes the French have implemented that negatively impact the U.S. tech sector.

Results from Black Friday, Cyber Monday, and the start of the Holiday retail shopping season are always under close scrutiny, but especially this year, with questions over economic growth sustainability. According to data from Adobe, online sales are up 20% over last year—to over $7 bil. on Black Friday and $9 bil. on Cyber Monday alone. Despite continual calls for the death of physical shopping, hopes for brick-and-mortar retail sales are also somewhat high, although this channel is seemingly continuing to lose ground to online/smartphone purchases.

Foreign stocks were held back by continued pessimism in economic conditions, as well as lack of progress in trade talks—coupled with the new trade spat between the U.S. and France. However, a weaker dollar helped improve these losses on net for domestic investors. Emerging markets fared well on the week, with economic woes showing some bottoming in key developed markets, stronger commodity prices and an improved trade picture between the U.S. and China, despite new frictions in certain sectors on a one-off basis, such as the U.S. and Brazilian steel producers.

U.S. bond prices declined as the yield curve ‘twisted’, with short rates falling and long rates rising, resulting in a more positive slope. More positive sentiment for risk assets has helped to push rates higher, along with continued implied promises from the Fed that rate cuts are done for the time being—effectively putting a floor on yields to some degree. Credit performed slightly better, with high yield and bank loans earning positive returns, as would be expected when risk is rewarded. Foreign developed market bonds performed similarly to domestic debt in local terms, but were helped by a half-percent decline in the dollar. Emerging markets fared even better, benefitting from risk-taking and improvement in sentiment about U.S.-China trade talks wrapping up.

Real estate declined slightly, with higher rates impacting the group negatively in the U.S., while the weaker dollar helped European REITs gain a percent for the week.

Commodities gained strongly last week, based on results from the energy sector, which more than offset declines in agriculture and precious metals. The price of crude oil rose by a dramatic 7% last week to $59/barrel, based upon news of OPEC cutting production by another 500,000 barrels/day in January (in addition to 1.2 mil/day of cuts from late 2018) in order to sustain oil prices. However, as usual, despite the rhetoric, debate continues about how much production will really be cut. Announcing production cuts accomplishes immediate goals for OPEC—pushing oil prices higher. However, as those prices rise, the incentive for ‘cheating’ (i.e. nations producing more than promised in order to take advantage of higher prices) increases.

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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