Bright spots in the U.S. economy last week included better-than-expected initial jobless claims, a strong showing from the Philadelphia Fed manufacturing index in October and stronger-than-anticipated industrial production in September. However, the housing market continues to struggle: Building permits, housing starts and existing home sales all were below estimates. Additionally, September retail sales missed forecasts.
In Europe, UK inflation was lower than predicted while wages exceeded expectations—but, as in the U.S., retail sales disappointed. Meanwhile, ZEW Economic Sentiment for the eurozone was weaker than expected while inflation was in line with estimates.
In Asia, China’s GDP and industrial production results disappointed—which possibly indicates that trade battles between the U.S. and China may be having a negative influence on the Chinese economy. More positive for China were retail sales figures that surprised to the upside, which suggests that stimulus efforts by the Chinese government could be beginning to bear fruit. In Australia, the unemployment rate was lower than predicted—an encouraging sign.
For the week, U.S. equity markets were essentially flat despite some turbulence along the way. Defensive sectors such as consumer staples and real estate outperformed as investors adopted a generally risk-averse attitude. Consumer staples also benefited from earnings results that exceeded expectations. In contrast, economically cyclical equities and sectors that are more sensitive to strong consumer spending—such as consumer discretionary and energy—underperformed. Consumer discretionary stocks remained under pressure given concerns related to global demand.
European equity markets emulated the U.S., with defensive sectors like telecoms outperforming more cyclical areas such as automobiles and construction. The Japanese market was volatile; like other markets it fell early in the week on Chinese economic worries but recovered some ground midweek. Emerging markets mostly lagged developed markets, with China and South Africa the most notable underperformers. That said, Brazil and Turkey continued to outperform.
In the fixed-income markets, long-duration securities underperformed shorter-duration issues as interest rates rose. (Rising rates hurt the prices of long-dated bonds more than prices of short-term bonds.) High yield bond performance, while lackluster, was better than that of long-term Treasuries. Emerging markets debt was mostly weak, with the Mexican peso and Chinese yuan continuing to depreciate. However, the Turkish Lira and Brazilian Real were positive offsets among emerging markets currencies.
GAIN: Active Asset Allocation
Equity markets were choppy again last week as investors navigated developments involving third-quarter earnings results, the upcoming midterm elections and the possibility of slower global economic growth.
Value stocks have outperformed growth stocks in recent months, after an extended period of underperformance. The portfolios are currently neutrally weighted to growth and value, but we are carefully monitoring for signs suggesting that value’s recent lead is solidifying. The portfolios are slightly overweight to domestic equities overall and U.S. large-caps, in particular. While large-company stocks have been more stable than small-company stocks lately, international equities have been more of a mixed bag—with Japan and Latin America showing relative strength, and Europe and emerging markets somewhat weak.
Bonds were down modestly last week as rates rose slightly. Bonds have posted losses during the past three quarters and are in negative territory so far this quarter. Corporate credits have been volatile, due largely to equity market swings. Some technical and performance indicators for corporates are showing signs of weakness lately.
PROTECT: Risk Assist
Although the global equity markets were essentially flat for the week, volatility was significant and volatility expectations remain very high for stocks. In contrast, bonds and currencies have relatively low levels of expected volatility.
There was no activity in the Risk Assist portfolios for the week. We will update our volatility forecasts this week due to recent market conditions.
SPEND: Real Spend
Despite being flat for the week, equities managed to outperform broad-based bonds—which are down nearly 1% quarter-to-date even in the wake of the stock market volatility seen so far this October.
Small-caps, value and preferred stocks fared the best last week, while large-cap domestic growth was the worst performing market segment. In the yield space, most fixed-income was down for the week—particularly high-yield bonds and investment-grade corporates. In contrast, preferred stock was up nearly 1%—and equity yield plays posted relatively strong returns, led by domestic REITs (up nearly 3%).
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