Weekly Economic Update

Economic Update 12-12-2017

  • Economic releases were mixed on the week, with weaker results in non-manufacturing ISM, factory orders and lower sentiment.  On the other hand, labor markets continued to perform, with jobless claims running at cyclical low levels and the monthly employment situation report coming in stronger than expected.
  • U.S. stocks gained for the week, as did developed foreign markets despite the tempering influence of a stronger dollar.  Bonds were generally flat, while commodities also fell due to the dollar’s strength coupled with other specific factors.

U.S. stocks fared well during the week on the large cap side, while small caps lost ground.  From a sector perspective, industrials and financials led with gains well over a percent, while utilities, healthcare and energy lost ground, ending in the negative.  Tax reform continues to drive overall sentiment, with varying degrees of celebration and concern based on which rumors emerge from Washington surrounding the bill’s status in conference committee.  It appears the corporate rate may have to rise from an original 20% to something around 22%, which is still desirably low.  Again, the key area of importance here is the impact on earnings for 2018 and beyond, which could be driven much higher assuming some type of tax package is passed.  Stronger payroll numbers on Friday also drove equities higher.

Interestingly, a unique catalyst pushed markets downward on Wednesday as the President appeared poised to recognize Jerusalem officially as the capital of Israel and begin moving the U.S. embassy there, from its current location in Tel Aviv.  While seemingly innocuous from a geographic standpoint, this gets to the heart of the Israeli-Arab conflict, the desire of Palestinians for their own state, and thus has been unpopular with Arab neighbors.

Foreign stocks performed decently in local terms, with gains over a percent on the week in Europe and U.K., but a stronger dollar pulled these back to earth, and turned gains into losses for Japan.  Generally, in line with what’s been seen in recent weeks, politics have been relatively benign, such as in Germany where discussions to create a coalition have again been opened and economic data has been demonstrative of continued growth.  Brexit negotiations have been moving along, with a deal in the U.K. agreed upon that includes a financial settlement to the EU that could reach nearly £40 billion.  Emerging markets fared weaker than developed nations during the week, but retain their year-to-date outperformance.

U.S. bonds were flat with minimal changes in the treasury yield curve, with high yield and bank loans performing a few basis points better.  Foreign bonds performed similarly in local terms to U.S. debt, but lost ground when accounting for the much stronger dollar during the week.

Municipals, however, gained sharply as investors snapped up new issuance for unique areas such as private activity bonds, which may lose their special tax-exempt status upon completion of tax reform.  In fact, a sizable portion of the muni universe may disappear upon changes in rules concerning such public/private bonds (such as for stadiums, airports and hospitals) as well as general muni ‘refunding’ activity, where new bonds are issued to replace older issues in order to take advantage of more favorable financing rates.  The private activity muni bond market contains carryover into infrastructure, which could affect how any broader plans are ultimately financed, when a larger-scale proposal is expected to be released by the administration in January.

Real estate pulled back last week in the U.S., with negative results also in Asia but gains seen in Europe.  Mortgage REITs experienced a solid week, continuing a strong year-to-date performance of nearly +20% upon a gradually rising rate environment; residential and industrial lagged for the week with negative returns.  Foreign REITs have continued to outperform the U.S. group, with help from a weaker dollar but also stronger fundamentals and M&A activity globally in the real estate space.

Commodities generally lost ground on the week, on the heels of a much stronger dollar—with all key segments declining several percent.  Energy fared better than most, although still lost ground as crude oil prices dropped by -3% mid-week due to a surprise gain in unleaded gasoline inventories and natural gas falling -10% upon more reports of a possibly warmer-than-forecast winter season across the U.S.  Industrial metals, particularly copper, also experienced weakness with concerns over Chinese demand on a forward-looking basis and higher supplies.

 

Period ending 12/8/2017 1 Week (%) YTD (%)
DJIA 0.46 26.06
S&P 500 0.39 20.72
Russell 2000 -0.97 13.47
MSCI-EAFE 0.09 22.17
MSCI-EM -0.46 28.82
BlmbgBarcl U.S. Aggregate -0.02 3.34

 

U.S. Treasury Yields 3 Mo. 2 Yr. 5 Yr. 10 Yr. 30 Yr.
12/31/2016 0.51 1.20 1.93 2.45 3.06
12/1/2017 1.27 1.78 2.13 2.37 2.76
12/8/2017 1.28 1.80 2.14 2.38 2.77

 

 

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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