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.

U.S. stocks declined for the week across market caps.  Declines mid-week appeared due to Fed Chair Powell’s optimistic tone indicated that strength in the U.S. economy could speed the pace of interest rate increases.  After recovering a bit, markets were affected negatively yet again on Thursday and Friday in response to the President’s announcement of several industrial metals tariffs, which raises fears of a global trade war, in the worst case—discussed above.  On the positive side, it appeared the multi-round NAFTA talks are being put on ice until next year, to follow the Mexican election.

From a sector standpoint telecom and tech fared best with minimal declines, while materials and industrials fell several percent and trailed the pack.  Per FactSet, who evaluates earnings patterns, Q4 earnings growth has come in just under 15%, the best in six years.  Contributing factors differ, naturally, but strong economic growth overall and the impact of tax reform are the reported largest drivers; while higher oil prices have helped energy and higher interest rates have buoyed the financials group.  The 12-month forward P/E based on consensus stands at 16.7, which is below the 5-year average of 16.0—within range of the long-term average, which has fallen in the 15-16 range.

Foreign stocks fared worse than U.S. equities, despite little change in the dollar during the week.  Much of the negative sentiment was tied to the reasons for the decline in U.S. equities—the threat of tariffs and a broader tit-for-tat trade war.  Europe fared worse, due to their status as heavier exporters, as did the emerging markets, while Japan fared better upon a stronger yen.  Nations more heavily involved in global trade tended to far worse than those less involved, such as India, while a decline in China’s manufacturing and services PMI indexes was also a surprise to markets.  Perhaps the global trade concerns distracted investors from the upcoming Italian elections (speculated on last week, and concluded yesterday, where the results were larger populist party gains than some expected—with a general anti-EU tone).  Then again, Italy has undergone almost a new government every year since World War II, so uncertainty is not new.

U.S. bonds ended the week flattish yet again with minimal changes in interest rates on the week, despite some mixed sentiment and inflationary concerns coinciding with new Fed Chair Powell’s testimony.  With positive returns, government bonds fared slightly better than investment-grade corporates, which sold off a bit.  Foreign government bonds experienced small gains as well, as investor flows moved away from risky assets, except for emerging market bonds, which lost ground.

Real estate returns were mixed, with returns minimally negative in U.S. retail, while cyclically-sensitive lodging ended sharply negative, as did Europe and the U.K.

Commodity indexes fell a few percent on the week, as declines in energy and industrial metals outweighed strong gains in the agricultural sub-index.  Crude oil prices declined by just under –4% during the week to close at $61.25.

 

Period ending 3/2/2018 1 Week (%) YTD (%)
DJIA -2.97 -0.30
S&P 500 -1.98 1.01
Russell 2000 -1.00 0.01
MSCI-EAFE -2.86 -1.97
MSCI-EM -2.83 2.04
BlmbgBarcl U.S. Aggregate 0.02 -2.11

 

U.S. Treasury Yields 3 Mo. 2 Yr. 5 Yr. 10 Yr. 30 Yr.
12/31/2017 1.39 1.89 2.20 2.40 2.74
2/23/2018 1.64 2.25 2.62 2.88 3.16
3/2/2018 1.65 2.25 2.63 2.86 3.14

 

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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