U.S. consumers remain strong, as evidenced by better-than-expected retail sales in November. Industrial production was also healthier than anticipated for the month, although both manufacturing and services PMIs were weaker than expected. On the jobs front, a mixed bag: While the JOLTS job openings survey was below expectations, initial jobless claims came in lower than predicted—a positive sign, especially after the previous week’s lackluster results.
In Europe, overall production was better than expected and the German ZEW index of economic sentiment exceeded estimates (but remained in negative territory). However, German manufacturing and services PMIs were weaker than forecast. Meanwhile, UK wages rose more than expected and employment growth surprised to the upside. That said, UK industrial and manufacturing production disappointed.
In Japan, machinery orders grew at a slower-than-expected rate, but industrial production and the Tankan large manufacturing index beat estimates. Producer prices also rose at a slower pace than predicted. Meanwhile, Chinese loan growth topped forecasts and fixed-asset investment met expectations—but industrial production disappointed.
The U.S. equity market slumped last week, largely due to concerns about the strength of the global economy. Sectors that outperformed included utilities and communication services. Utilities benefited from investors’ continued preference for more defensive areas of the market, while various internet-oriented stocks helped support the communication services sector. In contrast, financial services and energy underperformed for the week. Financials continued to suffer due to lackluster loan growth and macroeconomic concerns (the sector’s outperformance following the 2016 election has now faded). Energy stocks were hurt by falling oil prices and tepid Chinese economic indicators.
European markets also suffered due to global growth concerns, but fared better than the U.S. thanks to strong M&A prospects (especially in the banking sector) and because trade tensions faded slightly. Japanese markets, like the U.S., saw relative outperformance from defensive sectors and weakness from energy and financials. Emerging markets, while mixed, performed slightly better than the U.S. market as China made efforts to reduce tensions with the Trump administration over trade and tariff issues.
In the fixed-income markets, long-duration bonds generally outperformed shorter-duration securities. High-yield bonds and both emerging markets sovereign and corporate credits ended the week in positive territory as fixed-income investors became more risk-on and took advantage of lower valuations.
GAIN: Active Asset Allocation
Global equities started the week flat but ultimately finished lower—a result of both structural weakness and a lack of buyers. That said, emerging markets stocks held up relatively well as the U.S. and China continue to work toward a deal regarding trade and tariffs.
Fixed-income markets were mostly flat, with investors taking a wait-and-see approach going into this week, when the Fed will decide whether to raise a key short-term interest rate. The market’s reaction to the decision could go either way depending on the statement the Fed makes in the wake of its decision. For example, stocks could potentially benefit if the Fed holds steady while nonetheless expressing confidence in the domestic economy.
Meanwhile, the lack of buyers seen in the equity markets is also showing up in the corporate fixed-income space. The move lower on U.S. interest rates lately has been driven in part by institutions unwinding short Treasury trades they have had in place for some time. Rates could rebound a bit once that selling pressure diminishes (and if stocks stabilize).
PROTECT: Risk Assist
Despite a choppy week for equities, we made no changes to our Risk Assist models. The volatility forecasting we do regularly has enabled us to avoid getting whipsawed—that is, buying at high points and selling at low points—in the current volatile environment.
SPEND: Real Spend
Global equities fell while investment-grade bonds rose last week. As a result, the return spread between the two asset classes narrowed once again. The one-year spread now stands at -4%—the result of global stocks being down -5% and investment-grade bonds being down just -1% during that time period. That said, U.S. equities are still in positive territory during the past 12 months—up approximately 1%.
Inflation data was released last week, with headline CPI inflation for November coming in at 2.2%—in line with estimates, and down -0.3 percentage points from October. Core inflation was also 2.2%. Market expectations of inflation continue to drift lower, with longer-term estimates at 2.2% as well.
It appears that 2018 will be a year in which equities, broad-based bonds and even commodities will struggle to post positive returns. For example, year to date:
- Commodities are down -7%
- Investment-grade bonds are down -1%
- Global stocks are down -6.6%
On the plus side, REITs are up 2% for the year thus far, growth stocks are up 3.5% (despite their considerable volatility) and low-volatility stocks are up over 2%. One of the top-performing broad asset classes: Direct investment in the U.S. dollar, up +8%.
This year is a reminder that, sometimes, diversification does not work as it normally does—a fact that reinforces the importance of having goals-based planning and a retirement income solution in place.
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