Economic Update 7-23-2018
- Economic data for the week included a stronger-than-expected retail sales report, coupled with continued strength in the index of leading economic indicators, while industrial production and manufacturing data came in a bit mixed, and housing data disappointed, largely due to a drop in housing starts.
- U.S. equities were flattish on the week, with low volatility, while foreign stocks fared slightly better. U.S. bonds generally fell back as interest rates increased, coupled with mixed results from foreign bond markets. Commodities declined with weaker prices for crude oil offsetting stronger agricultural prices.
U.S. stocks were flattish on the week, with little volatility. Comments from the President appeared to be taken in stride by markets, perhaps a ‘new normal’, if investors are becoming desensitized to such comments including potentially raising the level of goods subject to Chinese tariffs to as much as $500 billion (accounting for almost all U.S. imports from China), and the displeasure at the Federal Reserve’s making life difficult on the economy by raising interest rates. Earnings have generally come better than expectations (with over 85% of firms beating estimates), with a third of companies in the S&P slated to report this coming week. Per FactSet, overall estimates have Q2 earnings coming in at a gain of +21% over the prior year—just under the +25% growth pace of the first quarter. From a sector standpoint, financials ended the week with the strongest results, up over two percent, while telecom and energy declined by almost -2%, the latter affected by oil prices settling back to a lower range.
Foreign stocks outperformed domestic stocks in developed markets helped by a slight pullback in the dollar and continued positive earnings results—as in the U.S. Sentiment continues to be largely driven by the ongoing U.S.-China-Europe trade/tariff talk, which appears to wax and wane by the day. Strength in Japan offset a negative week in the U.K., while Europe and emerging markets on net ended with tempered positive results. In EM, China lost ground again due to additional trade threats from the U.S., and Russia fell back along with crude oil prices; on the other hand, Brazilian stocks rose sharply in response to a new political coalition that raises the chances for a market-friendly result in the coming October elections.
U.S. bonds fell back as interest rates ticked up in the longer end of the yield curve. Government bonds outperformed investment-grade credit as spreads widened a bit; however, high yield was flat on the week and floating rate earned positive returns. Developed foreign bonds were flat on the week, despite the weaker dollar, while emerging market bonds again suffered.
Real estate lost ground on the week, in keeping with higher interest rates, with Asia ending the week as the sole region of positive return. In the U.S., mortgage REITs and the cyclical lodging sector ended the week positively, while industrial/office and residential suffered the strongest declines.
Commodities fell back on the week. Agriculture (wheat, corn and soybeans) experienced strong gains, with production issue in Europe helping wheat prices. This positivity was offset by declines in energy and both industrial and precious metals. Crude oil prices fell by -4% on to the week to end just over $70/barrel, with reports of Saudi Arabia opening supplies to certain customers.
|Period ending 7/20/2018||1 Week (%)||YTD (%)|
|BlmbgBarcl U.S. Aggregate||-0.27||-1.47|
|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.