Economic Update 1-14-2019
- Economic data for the week was lighter than usual, due to the Federal government shutdown, but was highlighted by a tempered but still-strong ISM services report, pullback in consumer inflation, decent labor data and release of the minutes from the last Fed meeting.
- Global equity markets recovered by several percent, in a continued effort to shake off the bear market of last quarter. Bonds were mixed, with interest rates inching higher. Commodities gained ground, again led by a recovery in crude oil pricing.
U.S. stocks continued their recovery last week, up several percent on hopes (again) that the U.S.-China trade dispute would be resolved through ongoing talks. It appears progress has been made in the areas of U.S. farm exports and better access to Chinese markets, while the key issue of Chinese technology pilfering remains unresolved. There also appears to be some recognition of value in equity markets, with P/E’s falling below long-term averages, after spending parts of the last year or two looking a bit ‘tired’, which is a euphemism for mildly expensive, even if not quite bubble-like. The now record-long government shutdown has not resulted in a major deterioration in market sentiment, although Fed chair Powell also acknowledged that a long-lasting episode could ultimately end up negatively influencing economic growth.
From a sector perspective, cyclicals outperformed, with industrials, consumer discretionary and technology leading, while defensive staples and utilities ended with minimal gains.
Foreign stocks rose along with U.S. equities, albeit to a lesser degree, with continued hope for U.S.-China trade resolution. This correlation with domestic stocks has been the tendency over the past several months, which has outweighed fundamental concerns over weakness in economic growth shown by slower industrial production numbers in Germany and France, in particular, and mixed results in Japan, which is hoping to generate some inflation to show that growth could be eventually improving. Overall, growth levels remain challenged in the foreign developed world, which has explained the weak results of regional stock markets. Emerging markets outperformed developed, with hope for trade resolution, which boosted China and Pacific region equities, in addition to stronger commodity results as of late, which has boosted prospects for materials exporters.
U.S. bonds were mixed in the week, with government indexes down as interest rates ticked back higher slightly, but credit outperformed with spreads contracting. Accordingly, high yield bonds experienced strongly positive results, followed by floating rate bank loans. Each of the latter two asset classes suffered during the fourth quarter as investor flows away from risk highlighted their somewhat higher equity correlations compared to other segments of fixed income. Foreign bonds gained slightly, with help from a weaker dollar.
U.S. treasury debt has long been thought of as the global ‘risk-free’ asset, where default is assumed to be unthinkable, and, therefore, is often the recipient of inflows when conditions turn sour in other asset classes. However, there are times when ‘risk-free’ isn’t a failsafe, either. As if the lesson wasn’t learned several years ago, the ongoing federal government shutdown has again caused bond rating agencies to discuss and/or even consider a de-rating for U.S. government debt. Even while Standard & Poor’s downgraded treasury debt a partial notch to AA+ during that 2011 summer debt ceiling debacle, Moody’s and Fitch held firm at AAA (albeit with their respective outlooks downgraded less severely to ‘negative’). However, Fitch has been providing warnings that stunts such as the government shutdown could again threaten that coveted AAA status, stating that such uncertainty was not consistent with behavior of nations deserving a top rating.
Real estate experienced very strong gains for the week, surpassing broader equity markets, with the exception of small cap. Cyclically-sensitive lodging and resorts outperformed, although all segments were sharply positive.
Commodities gained several percent, again driven by the volatile movements of crude oil, but also a weaker dollar and an increase in natural gas prices. Crude oil continued its roller-coaster ride, regaining ground to end the week 8% higher, at just under $52/barrel. While OPEC has reiterated its desire to raise prices to more budget-friendly levels in Middle Eastern and Eastern European producing nations, much of the recent volatility has been coupled with equity market gyrations and concerns over global growth—although demand is far more predictable than short-term supply. While forecasts are often not helpful in the commodity space, with no ‘fair value’ metrics based on actual cash flows, estimates for crude in the coming year appear to be in the mid- to higher-50s at this point.
|Period ending 1/11/2019
||1 Week (%)
|BBgBarc U.S. Aggregate
|U.S. Treasury Yields
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.