Economic Update 12-10-2018
- Economic data for the week was highlighted by stronger results for ISM reports in manufacturing and services, while factory orders and employment numbers for November came in showing slower growth than expected.
- Global equity markets slumped, with foreign faring a bit better than U.S. with help from a weaker dollar. Government bonds performed well, being the recipient of investor flows. Commodities rebounded as well, as crude oil prices rebounded higher.
In a week shortened by a Wednesday closure in honor of former President Bush’s passing, U.S. stocks suffered significant losses last week, which neutralized the strength of the week prior. As noted above, several items came together to again focus the negativity on risk assets. Every sector except defensive utilities was down, led by weakness in financials and industrials—two areas that appear most affected by lower interest rates and curve flattening, and Chinese tariff uncertainty.
Trade worries carried globally (again), resulting in similarly poor performance in foreign stocks—with similar returns in Europe, U.K., Japan and emerging markets. Thursday’s decline of -3% in Europe and the U.K. represented the worst single day in two years. Brexit uncertainty continue to drive sentiment in the U.K.; Germany’s market reached bear market territory, as levels fell -20% from peaks earlier in the year—largely the result of that nation’s especially export-heavy economy (particularly in the automotive and auto supply sectors). Japanese stocks have an indirect relationship with Chinese trade, while negative growth hasn’t helped.
U.S. bonds were the beneficiary of investor flows away from risk assets last week, with treasuries benefitting, with lower long-term yields, while credit spreads widened, punishing corporate credit—notably high yield. Foreign bonds fared well in both developed and emerging markets, with lower rates globally, and weaker dollar.
Ironically, investors also became concerned about a technical inversion that occurred in part of the yield curve, where the 5-year yield dipped below the 3-year, but also the 7-year, so the total curve remained positively sloped. This can happen for a variety of reasons, but primarily due to technical demand in certain parts of the curve—in this case, demand for the 5-year note was high enough to drive yields down.
Commodities fared well last week, with help from a weaker dollar and bounceback in energy. Crude oil rose by 3%, to end the week at just under $53/barrel, to offset a drop in natural gas prices from the extreme gains over the prior few weeks. Precious metals also saw gains, unsurprisingly, as investors sought out safe havens and interest rates on treasuries fell. The crude oil market was led by speculation about OPEC, and peripheral non-OPEC members, working on production and inventory cuts to stem the recent glut that has kept pricing low. The seesaw battle for oil price normalcy continues.
|Period ending 12/7/2018||1 Week (%)||YTD (%)|
|BlmbgBarcl U.S. Aggregate||0.85||-0.95|
|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.