U.S. economic data for the week was mostly robust. The Conference Board’s Consumer Confidence indicator exceeded expectations, coming in at its highest reading since 2000, while GDP growth for the second quarter was revised higher than initially reported. That said, the housing market continued to show some cracks:

• The S&P CoreLogic Case-Shiller National Home Price index (which measures the change in the selling price of single-family homes in 20 metropolitan areas) grew at a slower pace than expected.
• Additionally, the month-over-month change in pending home sales was both negative and below estimates.

In Europe, German current and future business expectation measures exceeded forecasts; however, German consumers were less sanguine about their current and future prospects. Meanwhile, France saw consumer spending and GDP results for the second quarter that were in line with expectations. And Italian unemployment was better than anticipated—the lowest it’s been since the summer of 2012—helping to keep overall EU unemployment at its lowest level in a decade.

In Asia, Japan enjoyed positive retail sales growth that exceeded estimates along with better-than-expected inflation results. Chinese manufacturing PMI results both increased and beat expectations on a month-over-month basis. But new capital expenditures by private companies in Australia declined in the 2nd quarter—below positive consensus growth expectations. Australian building approvals/permits also declined more than expected.

In the U.S. equity market, the technology and consumer discretionary sectors outperformed. Tech shares benefited from analyst upgrades and a general shift to a positive sentiment about the sector, while robust retail earnings reports supported consumer discretionary stocks. Defensive sectors such as telecommunications and utilities underperformed as interest rates rose and as investors continued to favor more growth and/or cyclical-oriented sectors.

After a positive start, European shares endured downward pressure later in the week as concerns over emerging markets risks, trade war worries and Italy’s financial health returned to the top of investors’ minds. President Trump resumed his aggressive stance towards the EU, which only added to risk aversion in Europe. Japanese shares were the standout performers for the week, as market participants turned more “risk-on” after hopes for a U.S.-Mexico trade agreement improved and as the country prepared for presidential elections.

Emerging market equities were hit hard as weakness in Argentina and Turkey sparked contagion fears, while the elevated trade war rhetoric only exacerbated the perceived emerging markets risks. Despite that, Taiwan and Russia markets outperformed their peers.

GAIN: Active Asset Allocation
The equity portfolios saw growth stocks, small-caps, and health care positions leading the way last week. That said, our positions in foreign stocks, global technology and equal-weight domestic-factor exposure were slight drags on the portfolio.

Now that school is back is session and summer vacations are over, we anticipate increased volume (and more volatility, potentially) in the coming weeks.

Bonds were down, overall, for the week. Longer-duration issues were especially weak. The recent comments by Fed Chairman Powell suggest that he will rely more on data than on economic models or theoretical variables. If so, investors may have to come to terms with interest rates remaining lower than expected for longer than expected, given the pace of previous rate-hike cycles.

Our barbell positioning in the fixed-income portfolios performed well during the week—with preferred stocks, high-yield bonds and real estate performing well enough to overcome the weakness in long-term Treasuries.

PROTECT: Risk Assist
It was a fittingly calm week for the last week of summer, with global markets as a whole essentially flat. The Risk Assist portfolios remain fully invested.

The market’s expectations for future volatility remain subdued for equities and interest rates. Investors do anticipate continued currency market volatility, however, and we will closely monitor that area of the market.

We created our volatility forecasts for September last week. They generally came down marginally from the previous month.

SPEND: Real Spend
So far this year, equities are performing relatively well—with global stocks up 3.5% and U.S. equities gaining 9.7%. In contrast, broad-based bonds are down 1.1% year-to-date. Bonds continue to trail inflation for the year, despite a positive August for the asset class (+60 basis points). Last week on CNBC, Warren Buffett stated (once again) that stocks are considerably more attractive than bonds and that there is no question in his mind that a basket of U.S. stocks will do better than bonds over time.

Multi-asset yield securities continued to show large spreads in returns (and, therefore, substantial diversification benefits) last week. For example:

• Preferred stock and REITs were up 50 basis points and 80 basis points, respectively, last week.
• Long-duration bonds and emerging markets debt were down more than 1% and 1.2%, respectively.

For the month of August, the spreads were even wider: Emerging markets debt and global infrastructure were each down more than 2.3%, while preferred stock and long-duration bonds were each up over 1.3%.

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