Economic Update 10-21-2019
- Economic news last week included mixed reports on the regional manufacturing and housing front. Additionally, retail sales and industrial production disappointed relative to expectations. The index of leading economic indicators declined slightly, in keeping with data that continues to show a mixed picture.
- Equity markets experienced gains globally, based on decent headline earnings reports and some optimism about formalized trade progress. Fixed income was little changed in the U.S. on the week, while foreign bonds outperformed due to a weaker dollar. Commodities were also little changed on the week, with a divergence in the energy space between natural gas and crude oil prices.
U.S. stocks were mixed overall last week, but ended with more gains than losses, as decent earnings served as a catalyst for better sentiment. Equities rallied early in the week with positive carryover sentiment from the announced but yet-to-be-confirmed early phase U.S.-China trade agreement. While it hasn’t been dubbed a full and complete ‘deal,’ it appears several minor concessions have been agreed to, such as removal/deferral of the October tariff round, as well as resumed Chinese agricultural product purchases (although amounts and timeline, if any, remain unclear). Markets could be jumping the gun with too much positivity, as the key substantive issues have yet to be addressed.
Aside from trade, several positive earnings reports in the financial and healthcare sectors added to optimism, by Goldman Sachs and JPMorgan in the former, and insurer UnitedHealth in the latter. Sector returns were in keeping with these results, as health care, financials and consumer discretionary stocks led with gains, while energy and technology ended up losing ground—the latter by a weak IBM report. Small caps remained in a quiet correction, down -10% from peak levels several months ago.
Foreign developed market stocks performed largely in line with U.S. stocks in local terms, but outperformed when adjusted for the impact of a sharply weaker U.S. dollar. Brexit progress, noted by a tentative UK-EU deal in light of the upcoming Halloween deadline, caused the pound to rally again. Now, will the deal be approved? If not, odds for another extension seem the best case scenario. Emerging nations fared similarly to developed nations, with strength in India offset by weakness in China. Chinese GDP growth for Q3 came in at 6.0%, below estimates calling for 6.2%—and the lowest rate of growth in 25 years. It appears the impact of tariffs is continuing to weigh on the Chinese economy despite stimulus efforts by the government. This is relative, though, with growth rates continuing to run several times that of the developed world, including the U.S. Naturally, slowing in China—one of world’s growth leaders—has led to downgrades of global growth by such entities as the International Monetary Fund.
U.S. bonds were little changed last week, with minimal changes across the yield curve. Investment-grade credit outperformed government debt, led by bank loans and high yield. With the U.S. dollar falling about a percent, foreign bonds gained sharply in USD-investor terms, in both developed and emerging markets.
Commodities were also little changed for the week on net, despite the weakness in the dollar, which is often a tailwind. Agricultural prices rose, natural gas prices spiked 5% due to expected heightened demand from colder weather across the U.S., while the price of crude oil fell by about -1.5% to around $54/barrel. Pricing continued in a trading range, with ample supply, yet fears about a global slowdown negatively affecting demand.
|Period ending 10/18/2019||1 Week (%)||YTD (%)|
|BBgBarc U.S. Aggregate||0.10||8.34|
|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.
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