Q1 Market & Economic Update

Not bad, not great, just OK

by Jeffrey Kravetz

Arizona’s performance is expected to remain moderately strong, picking up steam over the next year in new jobs, population, and income growth. Job growth beat the national average last year, but like other gains across a wider spectrum of data, it looks weaker when compared to the state’s historical performance over a 30-year period preceding the financial crisis from 1977-2007. This moderate strength, however, is potentially threatened by larger factors such as low fuel prices, which have the potential to adversely affect nearby Mexico and Texas. The strong dollar will also continue to be a headwind for exporters, including those in Arizona.

Economic Trends

The U.S. remains on target for growth ranging from 2-3% with 242,000 jobs added in February and an additional 30,000 added in January revisions. And despite the traditional problems imposed upon manufacturing by a strong dollar and the contradictions of weak energy prices, recent Institute for Supply Management

surveys and solid factory orders seem to indicate room for growth.

Conversely, despite renewed stimulus measures from the European Central Bank along with negative interest rates, European banks are still grappling with deleveraging, indicating potential growth of roughly 1% for the year. A lone positive is that the weaker euro is proving a boon to exporters.

Japan may also be pushing the limits of Quantitative easing and will need to refocus on structural reforms to lift gross domestic product growth. China will see slower growth in the area of 6.5% but looks to be taking measures to float the yuan, encourage wider equity ownership, and support consumer spending via QE. Meanwhile, Russia and Brazil are both mired in recession while India looks well positioned to continue its recent trend of strong growth.

Equity Markets

Market performance through the start of the year has been at times volatile but overall consistently mediocre as investors await further clarity on monetary policy and proof that energy prices are stabilizing, as they seem to be. At the moment, U.S. Bank Wealth Management believes that attractive opportunities can be found in a strategy centered around companies that perform well in a slow-growth, low-inflation environment, like technology, consumer discretionary, healthcare, financial and industrials. Expectations have built that the Fed will wait until June to raise rates, and in the meantime this has created a space with potential for upside, however limited, as investors wait for full resolution of the matter.

Fixed Income

Yields will continue to flatten as diverging central bank policies increase demand for more U.S. debt. In further support of this trend, corporate pension plans that have reached sufficient funding levels are beginning to move out of equities and into long-term debt, a move echoed more broadly by the widening population of retiring baby boomers.

The Fed is expected to continue along its gentle path toward normalization with all signs pointing to a rate hike in June. Meanwhile this past week, the president of the ECB, Mario Draghi, virtually enshrined a continuing aggressive QE policy with low/ negative rates past the end of his tenure and into the next decade.

Real Estate

Growth in the real estate sector is following the broader contours of the U.S. economy with the best opportunities now to be found in expanding secondary markets like Nashville, Austin, Dallas, Denver, Seattle, and Portland. New home sales are brisk, while the supply of existing homes is kept low by tight construction, which in turn is supporting prices and fostering a sellers’ market. Mortgage rates remain below long-term averages as applicants reached the highest number in nearly six years this past January.

Commodities

Energy prices appear to potentially be rebounding as production has decreased. U.S. oil production ramped down roughly 100,000 barrels in just the last four weeks, and rig counts have fallen 75% since their 2014 peak. Gains in industrial metals do not reflect fundamentals, but instead technical market conditions. Meanwhile, gold is poised for a decline if the Fed raises rates later this year. Grain supplies remain high after a third year of strong harvests. There is speculation this could influence fewer plantings next year driving future prices up.

You can find more information on all of these topics at https://reserve.usbank.com/insights

Jeffrey Kravetz is Regional Investment Director for The Private Client Reserve of U.S. Bank in Phoenix.

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This information represents the opinion of U.S. Bank and is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. The organizations mentioned in this publication are not affiliates or associated with U.S. Bank in any way.

Past performance is no guarantee of future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for investment.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. Investing in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. Investment in debt securities typically decrease in value when interest rates rise. The risk is usually greater for longer term debt securities. Investments in lower rated and non-rated securities present a greater risk of loss to principal and interest than higher rated securities. There are special risks associated with an investment in commodities, including market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes, and the impact of adverse political or financial factors. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates, and risks related to renting properties (such as rental defaults).

 

 

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