Economic Update 11-25-2019
- During the week, several housing metrics continued to show improvement, although still a bit below expectations, coupled with positive consumer sentiment. On the other, the index of leading economic indicators declined again, reflecting a general tempering in economic growth.
- U.S. and foreign equity markets declined last week, as optimism for a trade deal again waned. U.S. bonds gained, as the recipient of asset flows away from stocks, while foreign debt was held back by a stronger dollar. Commodities were down slightly, as declines in metals acted as more of an influence than the minimal change in the price of crude oil.
U.S. stocks fell backward last week, breaking a streak of six straight positive weeks. Conditions continue to be heavily tied to U.S.-China trade and the potential for a deal. U.S. legislative support for Hong Kong also appeared to negatively affect sentiment, by irritating Chinese officials. It appears that the final elements of a ‘phase 1’ are being worked on, yet the same sticking points persist, with current rhetoric pointing to no deal before the end of the year. This leaves the issues of the upcoming December 15 slated additional tariffs, as well as ongoing intellectual property theft elements that China has consistently pushed back on. The base case of a ‘grand deal’ are degrading into more of a multi-phased incremental set of deals, with continued big picture issues remaining as problems.
By sector, defensive healthcare and utilities forged ahead with positive returns, along with financials. Healthcare was helped by tempering of political language concerning a radical (and expensive) overhaul of the current healthcare system. Materials, technology and consumer discretionary stocks suffered with negative returns, as earnings for a variety of well-known retailers again fell short of hopes. Real estate bucked the trend of other assets by losing ground in the U.S., but fared well in Asia. Weakness was attributed to poor sentiment in the retail/regional malls sector, which disappointed from an earnings standpoint as winners and losers continue to be sorted out.
The case for recession probabilities continues to vacillate. In fact, there seems to be little consensus from a variety of firms—with one example lowering assessments of recession chances from 40% down to roughly 20%, and another well-regarded firm doing the exact opposite.
Foreign stocks also lost ground last week, similar to U.S. equities, with underperformance not helped by a stronger U.S. dollar. While European manufacturing PMI reports remained in contraction, they improved from last month, which continues to have some investors pointing to a potential bottom in sentiment. Emerging markets performed largely in line with other global regions, with surprisingly little variation between countries during the week.
U.S. bonds experienced a positive week, as movement away from risk pushed interest rates lower. U.S. treasuries and investment-grade corporates performed similarly, while high yield and bank loans lost ground. A stronger dollar held back foreign bond returns into the negative, in both developed and emerging markets.
Commodities generally fell back, along with a stronger dollar, as is often the case. Energy and agriculture were little changed, while industrial and precious metals experienced declines. Despite movement of a few dollars in both directions on the week, the price of crude oil was barely changed on net to end the week at just below $58/barrel. The movement in oil prices was related to slower-than-anticipated increases in U.S. supply, which kept prices sustained, in addition to reports that OPEC production cuts could be carried into 2020. OPEC is surprisingly only responsible for just under 40% of the world’s overall petroleum output, while adding ‘OPEC+’ large producers Russia and Mexico brings the total to over half, so establishing a consensus level of overall production and pricing objectives remain key issues going into next year (as they are every year).
|Period ending 11/22/2019||1 Week (%)||YTD (%)|
|BBgBarc U.S. Aggregate||0.29||8.63|
|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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