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Weekly Economic Update


Economic Update 1-21-2020

  • Economic news for the week included better results from several regional manufacturing indexes as well as stronger housing starts. On par with forecasts were tempered producer and consumer inflation readings, as were retail sales, while industrial production came in on the weaker side.
  • U.S. and foreign equity markets gained, with U.S.-China trade progress and the improved economic data. Bonds were little changed, although foreign debt was affected by a rise in the dollar. Commodities declined due to currency effects and lower energy prices.

So far in 2020, stocks have rallied in keeping with lower fears of recession, dampened escalation of the U.S.-Iran conflict, and, perhaps most importantly, the signing of ‘phase one’ of the U.S.-China trade deal, which boosted markets last week. Improved housing numbers also appeared to help sentiment. Earnings season is just beginning, with expectations for mid-single digit growth—below long-term levels, but certainly better than the flattish results from 2019. There are few hopes for a robust environment this year, but the ‘removal of hurdles’ appears to be a theme boosting overall market sentiment.

By sector, defensive utilities experienced the strongest performance, followed by communications and technology—all with gains upwards of 3%. Energy was the sole laggard again, with returns under -1%. In a change of recent trend, small cap stocks strongly outperformed large caps.

Foreign stocks fared positively, albeit at a slower growth pace than the U.S. Europe, U.K. and emerging markets all performed similarly, with the exception of Japan, which lost ground last week. It was announced that the German economy rose at a 0.6% rate for 2019, just over a fraction of the 1.5% growth seen in 2018. This lackluster performance of this weak economic growth, and accompanying lagging earnings growth, explains much of the return differential that has held back foreign equities. However, valuations remain more attractive, and bottoming of growth is often a sought-out catalyst for a turnaround. Chinese preliminary GDP growth came in at 6.0% for the full year, the slowest pace since 1990, with export-heavy activity continuing to decline in favor of more nuanced domestic consumer consumption, and lower-level manufacturing moving to other nearby nations with lower labor and infrastructure costs. Concerns over ongoing tensions with the U.S. persist, as does skepticism over the ability or desire to import $200 bil. of U.S. exports as agreed upon as part of the phase one deal.

U.S. bonds were little changed on the week, as indexes only moved a few basis points in either direction, in line with few changes in the treasury yield curve. By contrast, a strong dollar punished foreign developed market government bonds, which have minimal or negative yield to help buffet price fluctuations. Emerging market dollar bonds, on the other hand, gained sharply on the week.

Commodity prices declined overall on the week, in keeping with a stronger dollar. Agriculture and industrial metals gained, while energy prices declined. The price of crude oil fell by nearly a percent to around $58.50/barrel, with fewer geopolitical or supply reports to move the needle. Natural gas prices, on the other hand fell -10% upon reports of milder weather nationwide. Despite calls for higher demand from LNG exports and industrial use, the price of gas has fallen to nearly $2/unit.

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.