Economic Update 7-29-2019
- In a slower week for economic data, gross domestic product for the second quarter, durable goods orders, and jobless claims each came in better than expected. Several housing statistics continued to point to mixed conditions.
- U.S. equity markets fared well with positive returns, outperforming foreign stocks, which were held back by a stronger dollar. Bonds were generally flat on the week, with credit outperforming governments, and foreign markets mixed. Commodities lost ground broadly, due to the dollar effect, although energy was the sole exception as crude oil prices ticked modestly higher.
U.S. stocks fared positively again last week, with the S&P 500 and Nasdaq again reaching new highs. This occurred as hopes for interest rate cuts and decent stock earnings results kept sentiment high. By sector, technology and financials fared best, in keeping with earnings results—the latter by a stronger-than-expected by Alphabet/Google, which included a large share buyback announcement. Defensive sectors utilities, health care and consumer staples were the sole losing groups on the week.
Speaking of earnings, it was a busy week for Q2 results. Per FactSet, just under half of the firms in the S&P 500 have now reported, with nearly 80% noting a positive surprise on the EPS side and 60% on the revenue side. While most earnings surprises have come from technology and financials, the overall earnings growth level for the index is -2.6% thus far, on a year-over-year basis. To no surprise, firms with more global revenue exposure have underperformed—those with over 50% revenue from foreign sources have seen EPS fall -14%, while those with over 50% revenue from the U.S. have actually seen 3% EPS growth for the quarter. With expectations still fairly robust for the remainder of the year, the forward-looking price/earnings ratio at this point is 17.1x, above the 10-year average of 14.8x and long-term rough average of 15-16x.
Although it seemed to fly under the radar a bit, it was announced that the President and Congress have reached an agreement to suspend the debt limit for the next two fiscal years, and raise spending caps (to about $170 bil. over the next few years). While this agreement still requires full Congressional approval in both chambers, which will likely happen in coming days/weeks, this was resolved with a lot less drama than many feared, given the acrimonious relationship between the two parties. This removes one potential uncertainty from market dynamics in coming months, which some strategists had been a bit worried about.
Foreign stocks in developed nations gained in local currency terms, albeit not to the degree of U.S. stocks, but the impact was muted after translated for currency effects. On net, Europe was flat, followed by minor losses in Japan and the U.K., while emerging markets declined nearly a percent. As opposed to dollar strength in its own right, euro weakness appeared to be one catalyst, as the ECB kept their key interest rate unchanged, but noted that the economic statistics there were deteriorating, so was ready to cut rates soon as needed, based on data. This would represent the first outright cut in three years, with short-term rates already hovering around -0.4%. While easy policy normally boosts market sentiment, there appeared to be some disappointment at this less aggressive response, including an escalation of asset purchases to dampen long-term rates. Sentiment has also been mixed in Britain with the election of Boris Johnson as the new prime minister, resulting in several cabinet resignations following his announcement that a ‘no-deal’ Brexit possibility would remain on the table. Emerging markets were mixed to negative, with positivity in China based on continued U.S.-China trade progression and a diplomatic visit, while Mexico and Latin America have been bogged down by continued problems with state-owned energy company Pemex.
The IMF cut its global outlook down another tenth of a percent to 3.2% for 2019 and 3.5% in 2020. For the most part, these were triggered by ongoing trade tensions, as well as technology tensions that have bogged down global supply chains (Huawei being a key example), and continued chances of a no-deal Brexit.
U.S. bonds were generally flat, with little movement on net across the yield curve. Investment-grade corporates outperformed treasuries slightly, as credit spreads contracted over the week, with high yield bonds faring best, up over a half-percent. As the U.S. dollar gained nearly a percent last week, foreign bonds in developed markets fared poorly, losing ground with little yield cushion, while emerging market USD debt gained in similar manner to high yield, offsetting losses in EM local debt.
Commodities generally lost ground on average as the dollar gained sharply, with all sub-sectors losing ground except for energy. Within the energy space, natural gas fell over -4%, while the price of crude oil rose just under a percent to just over $56/barrel. With no new geopolitical news to upend oil markets, it appeared that slightly lower U.S. rig counts could have contributed.
|Period ending 7/26/2019||1 Week (%)||YTD (%)|
|BBgBarc U.S. Aggregate||-0.03||6.09|
|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.