The Fed Holds Steady and International Stocks Lead the Pack

Economic data coming out of the U.S. last week was mixed.

  • Several closely watched indicators of the economy’s health—GDP growth in the first quarter, manufacturing activity (ISM Manufacturing Index), and consumer confidence (University of Michigan consumer sentiment indicator)—were all below expectations.
  • On the plus side, job growth, initial jobless claims and orders for durable goods were better than anticipated.

The Federal Reserve Board left a key short-term interest rate unchanged at its meeting last week, in a range of 0.75% to 1%, and repeated its expectations that gradual rate hikes will be warranted going forward. The Fed also reiterated its balance-sheet reinvestment strategy.

In Europe, Euro-zone GDP growth for the first quarter was in line with expectations,

supported by better-than-expected Italian manufacturing confidence and Italian inflation. In contrast, first-quarter GDP growth in the UK disappointed on concerns that Brexit-related issues may be dampening economic activity.

Elsewhere, Japan’s results were mixed: Industrial production continued to disappoint, while the country’s jobless rate beat expectations.

In the global equity markets last week:

  • European stocks were the top performers once again. Optimism about Europe’s continued economic recovery, coupled with lower perceived political risks in the wake of the recent French election, helped push those shares higher.
  • Among U.S. equities, shares of technology companies lead the charge as the sector continued to post strong first-quarter earnings results.
  • Commodity-focused equities underperformed due to falling oil and industrial metals prices.

In the bond market, credit-oriented fixed-income investments (such as preferred stocks, high-yield bonds and bank debt) outperformed other sectors as equity markets strengthened. Longer-duration Treasuries underperformed as interest rates rose over the course of the week.

GAIN: Active Asset Allocation

Equity markets were relatively flat last week. Investors digested the monthly jobs report, news from Washington D.C., and first-quarter earnings and essentially shrugged off both the good and bad news.

Developed international markets outperformed both the U.S. and emerging markets. In the U.S., growth indices outperformed value indices modestly as oil prices remained weak. Interest rates moved higher as comments from Federal Reserve Board officials suggested they may raise rates sooner rather than later. Although bond prices fell in that environment, corporate credits (preferred stocks, in particular) held up well and our overweight in preferreds was beneficial.

PROTECT: Risk Assist

From a risk perspective, it was an extremely quiet week. The CBOE Volatility Index (VIX)—Wall Street’s so-called “fear gauge” that measures the market’s expectations for volatility 30-days in the future—briefly fell below 10 for the first time in a decade. Historically, the VIX has averaged around 20. At its current levels, the VIX suggests that investors are not worried about falling equity prices in the near term.

We sought opportunities to lock in recent gains in some Risk Assist models to help safeguard investors’ assets. We do this through a process we call ratcheting. When account values rise to meet certain targets, the protection level (or “floor”) is reset to reflect that higher amount.

SPEND: Real Spend

Comments from the Federal Reserve Board last week suggested that a rate hike at the Fed’s June meeting may be probable. Interest rates rose on that news, creating a headwind for fixed-income securities—particularly longer-term Treasuries, which are more sensitive to changes in interest rates. The broad bond market remained relatively flat for the week, which further widened the spread in performance between fixed-income and global equity markets.

Market expectations for inflation also remained relatively flat as the Fed indicated that inflation was hovering close to the Fed’s target range but still low. Survey-based measures of inflation were little changed since the last Fed meeting.

International equities were the strongest performing assets in the Spend portfolios for the week, while dividend-paying stock holdings lagged due to the small rise in interest rates.

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