Economic Update 2-18-2020

• Economic data for the week included improvements in retail sales, jobless claims, and consumer sentiment; industrial production declined for the month, led by some idiosyncratic factors. Consumer and import price inflation remained tempered, in line with recent trends.
• U.S. equity markets gained on the week as progress in containment of the coronavirus appeared to raise hopes for mitigating economic damage from the contagion. Foreign stocks gained slightly in local terms, but were held back by a stronger dollar. Bonds were little changed, with credit outperforming governments. Commodities gained, especially in energy and industrial metals, which are most sensitive to economic activity.

U.S. stocks showed further recovery last week, with the coronavirus appearing to look further contained. This boosted sentiment for risk assets due to a perceived shortened and lessened negative impact on consumption and manufacturing in affected markets (China directly, as well as nations relying on China for revenues and as a critical link in supply chains). In short, this negative blow to global GDP has overtaken U.S.-China trade woes as the key market ‘worry’ of the moment.

From a sector standpoint, the strongest results were split between defensive utilities and more economically-sensitive consumer discretionary and technology stocks—each gaining well over 2% for the week. Several other sectors, including materials and financials, brought up the rear with respectable gains of under 1%. Real estate gained sharply, by over 4%, with investors again seeking safety of strong fundamentals and positive sentiment from bullish acquisition activity.

Foreign equities in Europe and the U.K. were slightly positive on the week, but ended flat after accounting for a half-percent gain in the dollar. Aside from mixed sentiment surrounding the implications of the coronavirus, the Bank of England noted that interest rates were likely to remain low, and, at the same time, revised estimates of Eurozone growth for Q4 showed a meager rise of 0.1%, due to contraction in France and Italy, and 0.9% for 2019 as a whole. Japanese stocks fell over a percent, due to an expected severe economic decline in Q1, due to a close economic impact from coronavirus, tax hikes, and overall slowing trends globally. Emerging markets fared far better, with China unsurprisingly leading the way, up 2%, but also in developed market proxies for Far East trade, like Australia.

U.S. bonds ticked slightly higher on the week, with fewer flows away from equities toward safety, which caused minimal changes in the treasury yield curve. The curve is flat from the 10-year/3-month perspective, but remains slightly inverted from the alternative measure of 10-year/2-year. Interestingly, the 30-year treasury declined to nearly all-time lows reached last summer. Fed Chair Powell was guarded in his congressional testimony regarding economic impacts of the coronavirus, but markets continue to price in higher probabilities of another Fed rate cut this year, due to the overall negative global impact of the virus. Corporate high yield and senior loans outperformed, due to tighter credit spreads. Foreign developed markets fell back due to stronger dollar effects, while emerging market dollar-denominated and local currency bonds both ended as among the best performers of the week as investors again embraced risk.

Commodities generally rose on net, despite the headwind of a stronger dollar. The energy sector recovered sharply, by over 4%, as did industrial metals to a lesser extent as concerns over the magnitude and duration of the coronavirus impact faded a bit—implying less of a hit to energy demand in the near term from growing user China. After falling below the $50 level mid-week, the price of crude oil rose by 4% to $52/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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