Earnings season continued last week, with nearly 20 percent of S&P 500 member companies reporting their third quarter earnings. Some of the most notable results included:
- Netflix, whose shares soared more than 20 percent after the company reported stronger-than-expected earnings driven by better-than-expected subscriber growth.
- Financial services, which surprised to the upside on strong capital markets activity (especially in fixed-income trading). Nearly all major financial companies’ stock rose during the week thanks to positive earnings surprises.
- Railroads, which posted disappointing results due to lower coal shipments.
- Legacy large-cap technology firms Intel, IBM and eBay, all of which struggled as they reposition themselves for new dynamics in the technology industry.
Meanwhile, housing dominated economic reports, with most of the data being positive—including much stronger existing home sales and higher-than-expected building permits. However, housing starts were surprisingly weak, led by a decline in multi-family home starts.
Overseas, the European Central Bank left its benchmark interest-rate unchanged and maintained its asset purchase program at $80 billion euros per month. ECB President Mario Draghi reassured investors by saying an abrupt end to quantitative easing is unlikely. Elsewhere, China reported third quarter GDP growth of 6.7% from a year earlier and industrial output growth of 6.1%, helping to reduce ongoing fears of a slowing Chinese economy.
Oil prices hit a 15-month high last week, as crude oil inventories fell and investors anticipate the outcome of OPEC’s meeting at the end of the month.
GAIN: Active Asset Allocation update
Broad asset returns were generally positive last week, with both stocks and bonds rising. Foreign stocks led the way, with emerging markets in particular generating strong gains. Meanwhile, corporate bonds remained strong in the wake of mostly positive earnings reports for the third quarter.
Our equity portfolios are emphasizing growth stocks over value shares, and are overweight to Emerging Markets. On the fixed-income side, we are continuing with an allocation to corporate bonds that is overweight compared to our benchmark.
PROTECT: Risk Assist update
Measures of implied volatility fell sharply last week after the likely results of the U.S. Presidential election solidified and because the ECB produced no surprises in its monetary policy actions or its statements. For example:
- The CBOE Volatility Index (VIX), which measures the expected volatility of U.S stocks, fell from 16 to 14 (putting it in the 30th percentile over the past year).
- The EFA VIX, which measures the expected volatility of developed international markets, fell from 17 to 15 (9th percentile over the past year).
- The Emerging Markets VIX, which measures the expected volatility of developing international markets, fell from 23 to 21(12th percentile over the past year).
Meanwhile, investors appear to have become comfortable with the prospect of a December interest rate hike by the Fed, based on a confluence of events:
- Markets see a 67% probability of a December rate hike.
- Expected interest rate volatility is hovering at lows that haven’t been seen in years.
- Expected foreign exchange volatility is at its lowest level in two years
- As noted, expected equity volatility remains fairly low across the board.
SPEND: Real Spend update
Most holdings in the Real Spend models rebounded last week, with international and preferred stock positions showing the strongest bounce from the previous week.
So far this year, U.S. stocks, international stocks and the U.S. aggregate bond market have all posted very similar gains in the mid-single digits. This has produced an interesting result: The various Real Spend models (and many diversified portfolios, in general) have tended to generate similar returns year-to-date. Thus, returns have often been about the same for both aggressive, 100-percent equity investors and conservative, 100-percent fixed-income investors.
Real Spend models maintain broadly diversified portfolios of multiple asset classes; equity holdings include both domestic and international positions, as well as exposure to mid-caps and defensive sectors, and fixed-income holdings include municipal bonds, preferred stocks and short-duration instruments to buffer short-term market fluctuations. Because of this diversification, we believe the models are well positioned to weather a variety of market environments when asset class performance eventually begins to diverge.