Another Strong Week for Global Equities
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Last week saw mostly positive economic news in the U.S. Initial jobless claims once again were lower than expected, indicating that the domestic employment picture remains robust. Additionally, the Philadelphia Fed Manufacturing Index rose month-over-month and topped forecasts. That said, the Michigan consumer sentiment and expectations gauges were weaker than anticipated.

In Europe, industrial production fell more than expected but the trade balance surprised to the upside. Data out of the UK showed retail and core retail sales were below expectations, but core CPI and core PPI readings were slightly higher than predicted.  In Asia, new loan levels and outstanding loan growth in China was better than expected. The Chinese government also pledged to take steps to stimulate the economy. Japanese national core CPI and PPI were slightly lower than expected.

The U.S. equity market saw another week of solid gains, with cyclical sectors like financials and industrials leading the way. Financials benefited from better-than-expected fourth quarter earnings results from banks. Industrials got a boost from signs of possible progress between the U.S. and China on trade policies. Defensive sectors like utilities and consumer staples lagged as investors were willing to take on more risk.

European equity markets also rallied, as investors viewed the UK parliament’s rejection of Prime Minister May’s Brexit plan as a positive. Trade and economic news out of China also bolstered European markets. As in the U.S., European cyclical sectors—including autos and financials—led the pack. Defensive market sectors, like telecom and health care, lagged behind. In Asia, Japan benefited from China’s announcement of new economic stimulus efforts—although data showed that trade tensions continue to weigh on Japan.

Emerging markets stocks continued their recent run. In particular, Turkey last week began catching up with other emerging markets’ performance after the country’s equities were viewed more favorably due to increased signs of stability in the nation.

In the fixed-income market, shorter-duration securities outperformed longer-duration debt. High-yield bonds continued to benefit from a more risk-seeking market environment and as crude oil prices rose. Both sovereign and corporate emerging markets debt appreciated again last week, as investors allocated more capital to risk assets and after select emerging markets currencies rallied.

GAIN: Active Asset Allocation
Global equity markets saw another solid week, with a fairly broad-based rally that was led by the U.S. stock market. Earnings have been mixed, but investors remain encouraged.

The market upswing continues to benefit the portfolios. Our small-cap and large-cap domestic positions have performed well. Small-caps have been helped by strong performance from financials, as well as their higher beta profile. While positions in international markets are also up (both developed and emerging markets), they have trailed other areas of the markets.

Bonds have come under pressure lately as stocks have moved higher. For example, interest rates were up across the board last week. That benefited the portfolios, which have a relatively short duration profile. Our corporate credit positions have also recovered, following a lack of activity in the credit markets during December. Our positions in longer-term Treasuries and investment-grade corporates lagged other positions for the week.

PROTECT: Risk Assist
Volatility expectations fell modestly last week as more fourth-quarter earnings results were announced, with the CBOE Volatility Index (VIX) declining by roughly 2%. As was the case in the GAIN portfolios, positions in small-cap and large-cap domestic stocks were beneficial, while international positions lagged somewhat (despite gaining ground for the week).

SPEND: Real Spend
Global stocks have staged a strong recovery so far this year following their worst quarter since 2011, with global equities up 2.4% last week and investment-grade domestic bonds down slightly (-0.2%). That helped the return spread between stocks and bonds widen further last week: Year-to-date, global stocks are up 6.4% while bonds have returned -0.1%.

Meanwhile, over the past three years, the spread between global stocks and bonds is 11% in stocks’ favor (with stocks up 12.7% and bonds up just 1.7% during that period). This despite three notable pullbacks in global stocks—in January 2016, February 2018 and the fourth quarter of 2018—that averaged well over 10%. The message that one should take away: Stock pullbacks should be expected—it is the risk of short-term losses that helps to generate longer-term outperformance (such as the 11% spread during the past three years).

Growth stocks and small-cap stocks have benefited the Real Spend portfolios recently while international stocks have contributed the least among our equity holdings. Higher-yielding fixed-income positions are also doing well so far this year, while more defensive U.S. Treasuries and investment-grade corporate bonds lag.

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