Economic Update 4-23-2018
- Economic data for the week was highlighted by stronger retail sales, industrial production and leading economic indicator reports, mixed manufacturing results, and lackluster housing data.
- U.S. equity markets rose for the week, beating foreign stocks, with help from a stronger dollar. Bonds lost significant ground as interest rates ticked higher. Commodities were led by gains in industrial metals and crude oil.
U.S. stocks rose during the week, with tensions over recent Syrian air strikes dissipating, decent economic data, such as retail sales and housing, as well as earnings. Small caps outperformed large caps. From a sector standpoint, energy and industrials gained, with the former benefitting from higher crude prices; consumer staples lost significant ground as the only negative-performing industry for the week, with weakness in tobacco sales.
Earnings reports for Q1 are beginning to roll in, with results the best in about seven years on a year-over-year basis. Just under 20% of firms in the S&P 500 have reported, with 80% of those beating consensus estimates. Positive factors include a weaker dollar, which has boosted earnings from global operations, noted by more than half of calls so far. Much more to come, with only a fraction of firms in the S&P reporting thus far, but including estimates for upcoming quarters, 2018 consensus features earnings growth of over 18% and revenue growth of just under 7%. A bulk of earnings gains are originating from energy/materials, financials and tech. Forward P/E stands at 16.6, which is a bit higher than that of the last decade on average, but well within the tighter range of historical averages.
Foreign stocks performed positively, due to strength in Japan and Europe, as opposed to flattish returns in the U.K., due to weaker economic data in the latter. Emerging markets lost ground last week, with U.S. trade partner Mexico lagging along with China, despite continued strength in commodities, that buoyed Russia and Brazil. Chinese GDP for Q1 came in at +6.8%, which largely matched expectations. While formal Chinese growth numbers are considered less reliable in some circles, these appear to be coming in closer to estimates, due to economic forces tempering somewhat and growth evolving to secondary value-add industries.
U.S. bonds lost significantly as interest rates across the yield curve steepened further, with the 10-year treasury nearly closing at the 3% level. Government and investment-grade corporate indexes both ended in the negative, as did high yield to a more limited degree, while floating rate bank loans were flattish. Foreign bonds lost significant ground as well, due to a dollar strengthening by three-quarters of a percent, effecting both developed market and emerging market debt.
Real estate lost ground as rates continued to tick higher, resulting in negative returns in the U.S., but far less so in Asia, while Europe earned positive returns. Cyclical lodging/resorts fared best, while retail/malls lost several percent to continue their weak returns year-to-date.
Commodity indexes fared positively on the week, with gains in energy and, more dramatically, a +5% rise in industrial metals prices, offsetting the decline in agriculture. Notably, the metals prices were due to a spike in the prices of aluminum and nickel, the former being affected by U.S. sanctions on a particular Russian producer. Crude oil prices gained again, by +1.5%, to finish the week at $68.40/barrel, the highest levels in about three years and enough to spur tweets from the administration. A variety of factors appear to be a play, including continued commitment by OPEC to production cuts, ongoing trouble in Venezuela, a refinery explosion in Texas, and possible new sanctions against oil producers Russia and Iran. Interestingly, rig counts in the U.S. have grown by 150% over the past two years, but inventories of WTI crude fell in Q1 for the first time in over 20 years.
|Period ending 4/20/2018||1 Week (%)||YTD (%)|
|BlmbgBarcl U.S. Aggregate||-0.62||-2.30|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
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.