HI_Market Notes header_8272018

Energy and Retail Help Push Stocks Higher

The U.S. economy saw better-than-expected jobless claims and greater draws on crude oil inventories last week. That said, most economic news was lackluster—particularly in the housing market.

  • Monthly existing home sales in July missed estimates, coming in at their slowest pace in two years.
  • New home sales in July also were below expectations—and marked the first sequential monthly decline in new home sales since January.
  • Additionally, durable goods orders in July disappointed.

Overseas, French manufacturing and services PMIs beat estimates. Germany saw more mixed results, with services PMI exceeding expectations but manufacturing PMI coming in lower than anticipated. Overall, Germany’s GDP results for the second quarter were in-line with forecasts. In Asia, core CPI in Japan was slightly below expectations, while completed construction work in Australia during the second quarter was higher than anticipated. In addition, the People’s Bank of China took actions designed to help support the value of the Chinese yuan.

Most U.S. equity market sectors were up for the week. Energy led the pack, due to higher oil prices driven by falling inventories and because of a weaker U.S. dollar. The consumer discretionary sector also outperformed, as many retail-oriented companies reported strong earnings results for the second quarter and/or positive guidance for their future earnings. In contrast, defensive sectors such as consumer staples and utilities underperformed as investors favored more “risk on” and cyclical areas of the market.

European markets were relatively quiet, although most indices gained ground as perceived risks about Turkey abated. Japanese equities were essentially flat, unphased by U.S.-China trade war actions. Despite some additional volatility, emerging markets broadly outperformed for the week—with China doing well and Latin America underperforming.

In the fixed-income market, longer-duration bonds continued their streak of outperformance relative to shorter-duration issues and high-yield securities. Emerging markets debt rose. Currencies like the Turkish lira and South African rand strengthened, while the Brazilian real and Argentinian peso depreciated.

GAIN: Active Asset Allocation
Equities had a strong week, with both emerging markets and small-caps doing well. The portfolios are tilted towards small-cap stocks because they have exhibited strong risk-adjusted performance. They have benefited from the tax law passed last year and strong GDP growth in the U.S., and have also held up relatively well this year during market sell-offs brought on by geopolitical tensions. We continue to favor domestic equities at this time, while monitoring how trade talks between the U.S. and other nations will eventually be resolved.

We remain overweight to the healthcare sector in the portfolios. The sector has been strong, with both growth and defensive characteristics.

We expect that trading volume will be light this week, helping equities to drift higher. As summer comes to a close, we anticipate higher volume in the markets.

In the fixed-income portfolios, the barbell positioning we have implemented—long-term Treasuries balanced out with preferred stock and corporate credit positions–performed well for the week. We did see some weakness in our senior loan position. Expectations for interest rates are well anchored in the markets—it would take a surprise move by the Fed to spook income investors, and we don’t expect that to occur.

PROTECT: Risk Assist
A typical August week saw equities grind slowly higher on extremely low trading volume. Our volatility forecasts for August came in lower than July forecasts, which is consistent with how this month has played out thus far. We will update our volatility forecasts shortly before Labor Day.

SPEND: Real Spend
Global stocks had a strong week, up more than 1%, while bonds were up by around 25 basis points as the yield on the 10-year U.S. Treasury was essentially flat. Stocks’ outperformance relative to bonds remains strong. For example:

  • Year-to-date, global stocks are up 3% and broad-based bonds are down 1%.
  • Over the past 12 months, the spread in returns between global stocks and broad-based bonds is more than 13% in stocks’ favor.

In the Real Spend equity portfolios, our growth and small-cap positions have outperformed, while international holdings have trailed. On the fixed-income side, our positions in preferred stock have outperformed our broad Treasury-focused holdings so far this year.

Yield-focused investments generally generated similar returns for the week, with the exceptions being long duration bonds (up more than 1%) and REITS (down nearly 1%).

Later this week, data for the Fed’s preferred gauge of inflation—the PCE index—will be released. Current expectations call for inflation to come in around 2% in aggregate.

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Consumer Spending Strong in Summer

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