With the first third of the year behind us, let’s take a look at how different assets have performed so far in 2016. It has been a wild ride, but some trends are becoming apparent.
The dominant theme, as has been the case for several years, is that central banks rule and roil the markets. The Federal Reserve and European Central Bank don’t have to take significant actions any more. They move markets and business behavior by making carefully worded statements.
Currencies are what the central bankers most want to influence. Most now want to cheapen their own currencies relative to others. That’s been good for gold. It has been the main insurance against central bank mistakes. After a bear market in gold since 2011, the precious metal is up more than 20 percent so far this year. The dollar’s down against most major currencies, but many emerging economy currencies are appreciating.
Stocks generally have been in a trading range, albeit a very wide one. The S&P 500 is up only 1.64 percent. The Dow Jones Industrial Average is down 1.3 percent. The All-Country World Index is up 0.93 percent. Emerging markets are doing well, up 3.54 percent for the year. The Russell 2000 index is down 0.59 percent.
Bonds generally have done well since the bankers said they want interest rates either to be lower or stay low for a while. Long-term treasuries are up 8.20 percent, though they are below their highs for the year. Treasury Inflation-Protected Securities (TIPS) are up 4.56 percent. High-yield bonds are up 4.57 percent.
Energy-based commodities are up 3.30 percent. Broad-based commodities are up 7.22 percent.
The effectiveness of all of this central bank easing varies. The Fed’s efforts have less effect in the United States than they did a few years ago. But they appear to have very positive effects on commodities and emerging economies. Japan’s central bank is having trouble moving its economy forward. The European Central Bank appears to be doing the least amount possible to keep the continent’s economy growing at a slow rate.
At some point, these efforts won’t be very effective. Monetary policy has to be accompanied by pro-growth fiscal policies, and we don’t see much action in that direction in any of the major countries. Even in the U.S. presidential election, it seems to be the one issue no one wants to talk about much. But strong policies are needed to increase economic growth, improve corporate earnings and reduce debt. Without them, we’ll continue to have very modest growth and repeated crises or near-crises.
The data continue to indicate that households are reducing their economic activity in 2016 because they are less optimistic about the future.
While personal income rose more than expected at 0.4 percent for the last month, consumer spending increased only 0.1 percent. The spending numbers are volatile from month to month, but the last few months indicate households currently are saving their income increases and the benefits from lower gas prices. Auto sales, which increased strongly for most of the recovery, faltered in recent months.
Also, the PCE Price Index, the Fed’s preferred measure of inflation, continues to increase at a modest rate and is below the Fed’s 12-month target at 1.6 percent.
But there might be some pressure on prices in the future. The Employment Cost Index showed a third straight quarter of solid wage increases to bring the 12-month increase to 1.9 percent. The first quarter increase was the highest of this recovery. Even so, it is well below the typical increases before the financial crisis.
Related to the decline in consumer spending, consumer sentiment declined a little in the last month. Consumer sentiment now is at the lowest level since September, and the decline is mostly from less optimism about the future.
There’s more mixed data on manufacturing. The Chicago Purchasing Managers Index declined much more than expected to 50.4, just barely indicating expansion.
The PMI Manufacturing Index and the ISM Manufacturing Index each also declined, but by much smaller amounts. Each of those indexes also barely indicates expansion in the sector. There were several very positive components in the ISM index, especially among new orders.
Factory orders increased a strong 1.1 percent, though last month’s negative number was revised to make it slightly more negative. For the first time since last October, Factory orders excluding transportation, which is volatile and also influenced by defense spending, had a gain. Indeed, factory orders notched its largest gain since June 2014.
Outside of manufacturing, the PMI Services Index rose and was above expectations. It also is at its best level since January. The ISM Non-Manufacturing Index also rose more than expected and indicates solid expansion. Most of the components of the index were very positive.
The ADP Employment Report was well below expectations, showing only 156,000 jobs created in the private sector. It is one of the weakest months of this recovery and the weakest since February 2014. Even so, it is a large amount of jobs created for an economy with an unemployment rate below 5 percent.
New unemployment claims rose 17,000. That still leaves the four-week average near historic lows, and lower than a month ago. Two weeks of increases, however, mean the labor market might be weakening a little. We’ll be watching other data closely for signs of a change in the trends.
Two more signs of pressure on corporate earnings were in the quarterly Productivity and Costs report. Productivity declined again, by 1 percent this time. That’s the fourth decline in six quarters. Also, unit labor costs increase by 4 percent. That’s the largest increase since the fourth quarter of 2014. The unit labor costs increased because hours worked rose while output declined. It’s not a good combination for corporate profit margins.
Overall, the data continues to show an economy growing at a modest rate, though the rate is less than in 2015. Manufacturing might be forming a bottom and perhaps making a positive contribution to overall growth. Housing continues to contribute to growth, though also at a lower rate than last year. The same is true of household spending and the service sector of the economy.
Market trends of the last few weeks were reversed this week. risky assets lost value while safety assets did well.
The S&P 500 lost 2.07 percent over the last week as of Wednesday’s close. The Dow Jones Industrial Average lost 2.18 percent. The Russell 2000 lost 3.58 percent. The All-Country World Index lost 3.09 percent. Emerging markets slid 6.05 percent. In addition, long-term treasuries returned 1.47 percent. Investment-grade bonds gained 0.08 percent. Treasury Inflation-Protected Securities gained 0.31 percent. High-yield bonds followed stocks, losing 0.98 percent.
The dollar declined at first but then rose for a 0.2 percent gain for the week. Meanwhile, energy-based commodities lost 2.33 percent. Broad-based commodities lost 0.99 percent. Gold gained 2.83 percent.
— Bob Carlson