Weekly Economic Update

Economic Update 3-26-2018

  • Economic data for the week included an increase in the short-term interest rate by the Federal Reserve, as well as stronger durable goods orders and leading indicator results.  Housing and jobless claims results were mixed to some degree.
  • Global equity markets declined due to a variety of negative inputs, including fears of a widespread deterioration in global trade conditions.  This pulled the dollar down by nearly a percent, helping temper losses for foreign stocks.  Bonds ended the week slightly higher, as interest rates tempered a bit, with foreign outpacing U.S.  Commodities gain on the heels of a sharp move higher in the price of crude oil.

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Fed Note

Fed Note

The March FOMC meeting ended today featured a 0.25% increase in the fed funds rate, taking the range from 1.25-1.50% to 1.50-1.75%.  This was largely anticipated due to the strength of economic and labor data in recent weeks, which had moved the probability of a hike to almost certain, and the vote was unanimous.  With this being Jerome Powell’s first formal meeting and press conference as chair, markets are most likely looking for consistency, and a measured pace of continuing steady rate hike progress that started under Janet Yellen.  In the press conference, comments hinting of inflation fears, worry over fiscal or trade policy, the economy running ‘too hot’ or other signs that the Fed is ‘behind the curve’ in raising rates, would likely not be taken as well by financial markets.

The official statement noted the continuing strength in the labor market and economic activity rising at a moderate rate, while household and business spending has moderated from the prior quarter.  Inflation was noted as somewhat mixed, with signs of some increases but generally below target on a broader level.  A focus continued to show desire for a tempered pace of rate normalization.

The quarterly summary of economic projections was released and featured minor adjustments from the Dec. 2017 edition.  Median GDP estimates for 2018-2019 increased by a few tenths to 2.7% and 2.4%, respectively, staying above the longer-term expected rate of 1.8%.  Unemployment rates were also revised to stronger/lower levels, to almost a percent below the long-term expectation of 4.5%.  Inflation estimates were little changed, with 2.0% the expectation for the next several years and long-term.  Fed funds rate projections were unchanged for this year, at 2.1%, but ticked a few tenths higher for 2018 and 2019, at 2.9% and 3.4%, respectively—with the long-term a tenth higher to 2.9% (implying almost a 1% real rate).

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Weekly Economic Update

Economic Update 3-19-2018

  • Economic data for the week was highlighted by a drop in retail sales and housing statistics, but gains in industrial production, continued strength in several manufacturing metrics and labor.  Inflation results were as expected, reducing fears from last month.
  • U.S. equity markets fell back for the week on lackluster news, but were offset by positivity in foreign stock markets.  Bonds also gained a bit of ground as interest rates ticked downward under recent highs.  Commodities were flattish, although crude oil prices rose during the week.

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Weekly Economic Update

Economic Update 3-12-2018

  • Economic news for the week included a slight decline in the still-strong non-manufacturing ISM index, and a deterioration in the trade deficit, while the employment numbers for February showed strong labor growth yet a tempering in wage growth pressures that have worried markets.
  • Equity markets gained in the U.S. and Europe with positive economic data and hopes that tariff talk will be tempered somewhat.  Bonds were mixed, with interest rates ticking slightly higher and the U.S. dollar little changed.  Commodities gained slightly along with a slight rise in oil prices.

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Weekly Economic Update

Economic Update 3-06-2018

  • Economic data for the week included strong readings for manufacturing, consumer confidence and jobless claims, a slight revision downward in prior-quarter economic growth, but declines in durable goods and new/pending home sales.
  • Equity markets suffered due to uncertainty surrounding potential new trade restrictions.  Bonds were little changed with interest rates holding steady, but gained slightly as assets moved away from risk.  Commodities lost ground following declines in crude oil prices, which was tempered a bit by gains in other segments.

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Weekly Economic Update

Economic Update 2-26-2018

  • In a slower, holiday-shortened week, a sparse amount of economic data was led by a decline in existing home sales, a sharp move higher in leading economic indicators, a strong jobless claims report, coupled with FOMC minutes from January that leaned toward economic optimism.
  • U.S. equity markets moved forward on the week, as did emerging markets, while foreign developed markets were held back by a stronger dollar.  Bonds were flattish, with little change in interest rates during the week.  Commodities were pushed higher by stronger pricing again in crude oil and natural gas.

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Weekly Economic Update

Economic Update 2-20-2018

  • In a busy week for economic releases, highlights included weakness in retail sales and some hints of increasing inflation as measured by import prices, PPI and CPI. On the positive side, manufacturing continues to look robust in several regional surveys and jobless claims remain very low.
  • Equity markets around the globe gained sharply on the week to rebound from their recent correction. Bonds fell back again as interest rates inched higher in reaction to higher inflation and expectations of stronger growth. Commodities regained some ground as well, led by higher crude oil prices and a weaker dollar.

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Weekly Economic Update

Economic Update 2-12-2018

  • Economic news for the week was light, relative to that of financial markets, but highlighted by gains in the ISM non-manufacturing survey and continued strong labor market data.
  • Continuing a trend begun the prior week, stock markets lost more ground, passing through the -10% correction threshold.  Bond markets were slightly negative as rates fluctuated before returning to their starting point.  Commodities lost ground led by declines in crude oil.

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Communicating the Recent Market Volatility with Clients

Listen to how Bud Kasper is communicating the recent spike in market volatility to his clients

Click here for playback

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LSA Tax Efficient Model Revisions

TAX EFFICIENT PORTFOLIO REVISIONS

 

As 2018 begins and volatility is starting to pick up LSA will be recommending changes to Private Client Tax Efficient portfolios this week to address three primary investment themes and to continue with our movement of reducing risk or correlations in the portfolios.  As market volatility is at historically low levels we believe that this will not be a continued trend moving forward especially around the Federal Reserve’s attempt to unwind QE.  The IPC will be recommending funds in the models with the attempt to reduce risk and to provide solid downside protection or improve diversification in the models targeting more attractive valuation opportunities.  Although the IPC continues to believe that a recession is not eminent in the next 6-12 months, we do believe that the probability of a recession in the next couple of years has increased greatly over the last eight months.  The February 2018 model changes are not targeting big shifts in asset class exposures as we believe the portfolios handled well in 2017 but we will continue to explore the use of alternatives to reduce correlations, emerging market equities to go after attractive valuations, and commodities as ways to combat inflation.

 

Please login to the LSA site to view all changes:

 

TRADE DATE IS SCHEDULED FOR February 7, 2018

 

Private Client Tax Efficient – (Inclusive of the NTF Models):

Posted February 1st:  Private Client Tax Efficient – targeted trade date – Wednesday, February 7th.

*As a reminder, the Revision Explanation Presentation is posted in the “Portfolio News,” section on the LSA Beta PC Tax Efficient home page.

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Special Market Commentary on Recent Volatility

No doubt some of you have been fielding client questions or considering ways to ‘remind’ clients about more normal market volatility that has resurfaced over the past week.

It’s likely that mainstream news will gravitate to headlines of ‘largest point drop in history’ in reference to the declines of Dow Jones Industrial Average reaching 1500 (which is true).  What isn’t discussed, however, is the far higher starting point of over 25,000, compared to the last notable low nearly a decade ago in March 2009 around the 6630 level.  As such, a thousand points today represents only a few percentage points after an extremely strong stretch of performance (and near-30% gains last year alone for the DJIA).  Insofar as the S&P 500 goes, 2017 did not feature a single negative month of performance and, including January, equity markets had gained in 22 of the last 23 months.

From a practical standpoint, we know such a winning streak is welcome when it occurs, and is easy to take for granted, but the fast trajectory is not sustainable indefinitely, nor are stretches of extremely low volatility.  A three-steps-ahead and one-step-back is generally healthier in keeping exuberance in check, although one might argue exuberance for the stock market has remained restrained, even with its success, as recent memories of the financial crisis are hard to erase and some level of skepticism persists.  Based on data over the last hundred years, pullbacks of -5% or so are to be expected about once per quarter, those of -10% about once a year, and the -15% variety have roughly occurred biannually.  We’re certainly on borrowed time for a moderate pullback, and have almost matched a record length of time without having one.

When momentum runs for an extended period, of course, the tipping point for a market correction and catalyst needed for generating one become far more sensitive.  What is the current catalyst de jour?  Interest rates.  Investors have to be careful in what they wish for.  Seeing signs of stronger economic and stock earnings growth, driven by better fundamental conditions, tax cuts, business activity and general speculative ‘animal spirits’, has been a key hope by many economists and strategists over the past several years.  The drawback, however, is that such strength can create the sometimes-tricky byproduct of higher inflation.  Any indications of inflation picking up (in terms of pace of wage gains, although overall inflation remains quite low) can cause bond market interest rates to pick up as well.  These higher rates could also be overdue, as the Fed has worked to normalize monetary policy by removing the artificial stimulus that characterized the past decade of extremely low rates.  On the flip side, there remains ample demand for U.S. bonds due to low interest rates in other developed countries and equity market shocks tend to push investors from stocks to bonds—lowering rates and closing the circuit somewhat.

All-in-all, there are not a lot of surprises here.  Market pullbacks based on fundamentals should be healthier and less damaging than those driven by a geopolitical shock, such as war or terrorist activity, or due to the more extreme case of heightened recession fears.  Last year represented an especially strong year for risk assets, where it was difficult to find data that wasn’t showing signs of improvement.  This is still the case; however, the better conditions get, the harder it is to improve further—this may be one of the key hurdles we face in 2018.

 

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Weekly Economic Update

Economic Update 2-05-2018

  • Economic news for the week was highlighted by the FOMC keeping interest rates unchanged in their first meeting of the year, Manufacturing surveys showed a bit of a drop while remaining high, housing data showed gains, and the employment situation report came in stronger than expected.
  • Global equity markets declined sharply on the week, led by weakness in the U.S. coupled with higher interest rates.  These same rates increases also punished bond markets, particularly on the long-term part of the yield curve.  Commodities also came in lower, due to a pareback in energy prices for the week.

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