HI_Market Notes header_6252018

Defensive Sectors Outperform as Quarter End Nears

A mixed week for the global economy saw U.S. housing starts beat expectations but existing home sales and building permits disappointed. Overseas, manufacturing PMI in Germany and France were weaker than expected—yet services PMI in both countries beat forecasts.

U.S. equity investors favored defensive areas of the market, with utilities and consumer staples sectors outperforming for the week. Shares of companies in cyclical sectors such as industrials and materials underperformed on fears that incremental trade tariffs could hurt their bottom lines. Energy shares got a boost late in the week as it became clear that OPEC would not boost oil production as much as originally anticipated.

Internationally, European stocks underperformed due to continued trade and tariff tensions. Meanwhile, a select few emerging markets—including Argentina—outperformed as they were set to be included in MSCI’s emerging markets indices.

In the fixed-income markets, U.S. government-issued securities tended to outperform those issued by European governments.  Emerging markets debt stumbled early in the week but ultimately outperformed by the week’s end as many EM currencies recovered some of their previous sessions’ losses.

GAIN: Active Asset Allocation
Stocks delivered unimpressive results overall for the week. There was a rotation away from the market’s top quarter-to-date performers—a pattern of “selling winners” near quarter end that has become increasingly common during the past decade. Such rotations tend to be short lived, typically reversing once a new quarter begins.

We’ve also seen significant dispersion in returns among the major global markets (U.S., Europe, Asia, etc.) during the quarter. One example: There is an 18% difference between the performance of U.S. small-cap stocks and emerging markets stocks so far this quarter. That’s the largest quarterly dispersion since 2008. Wide dispersions also currently exist between U.S. large caps, U.S. small caps, developed international and emerging markets stocks.

The portfolios have benefited from their positions in growth stocks and in small-caps. Emerging markets and European holdings have been drags on performance. We maintain our current equity allocations, with an overweight to U.S. stocks and an emphasis on growth over value. Small-caps are at a benchmark weight.

Bonds were flat generally, with some weakness in the credit markets as stocks became more volatile. We have been overweight to corporate debt, but spreads have started to creep up over the last several weeks, a development that we are monitoring.

PROTECT: Risk Assist
It was another largely sideways week for global equities as markets lacked any strong trend in either direction. As we head into summer, volatility expectations for stocks remain generally low—the VIX closed the week below 14, which is lower than its long-term historical average.

SPEND: Real Spend
Global equities ended the week down. Bonds, while flat for the week, outperformed stocks—with the yield on the 10-year U.S. Treasury note inching down to 2.90%.

Year-to-date, global stocks continue to outperform—up 1.0%, with U.S. stocks up 4.0%. In contrast, bonds are down more than 2.0%. Additionally, the return spread between global equities and bonds over the past 12 months is 13.7%.

REITs were the best performers for the week, up 1.8%, followed by investment grade bonds (up 0.1%). In contrast, high-yield bonds were down 0.2% and preferred stocks  were flat.

During the coming week, we will be paying close attention to inflationary data that will be released, such as PCE and personal income and spending.

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Categories: Market Notes