Economic data in the U.S. and abroad continued to exceed expectations as the year began, as it did during the final months of 2016.
- In the U.S., the ISM Manufacturing Index, which measures activity in the manufacturing sector, came in much stronger than expected in December—rising to a two-year high, in anticipation of stronger economic growth.
- Globally, stronger-than-expected PMI data (which gauges economic activity) was reported in the UK, Germany, France and China. Inflation in the euro zone also rose to a three-year high—a potential sign that Europe’s economy is recovering.
Meanwhile, notes released from the Federal Reserve Board’s last meeting in December revealed that Fed officials weighted risks to growth from future fiscal policy and saw a gradual rate-hike pace as appropriate for the coming year.
GAIN: Active Asset Allocation
Global stocks got off to a strong start in 2017, with foreign indices outpacing the domestic market. This shift to international out-performance actually began during the final week of 2016, and has pushed international markets more than 2% higher in 2017.
Small-company stocks modestly outpaced large-cap shares last week, and we continue to overweight small-caps. The pro-U.S. fiscal policies that may be implemented going forward are likely to have an outsized benefit on smaller firms, which typically generate the bulk of their revenues from the U.S.
Interest rates in the U.S. fell, helping to boost bond prices so far this year. Corporate bonds have continued to outpace Treasuries, in general, and we continue to emphasize corporate credits in the portfolios.
PROTECT: Risk Assist
The Risk Assist portfolios began 2017 well positioned to benefit from the solid stock market performance seen thus far. Where applicable, we will seek to employ our “ratcheting” strategy designed to help protect recent portfolio gains that have occurred from the stock market’s strong positive returns of late.
SPEND: Real Spend
Domestic and international equity markets significantly outperformed the broad fixed-income markets last week. This benefited the Real Spend portfolios, which allocate a significant percentage of assets to equities (relative to other retirement income strategies).
Inflation has become a growing concern among investors and the Federal Reserve Board. Minutes released last week from the Fed’s most recent meeting stated that “market-based measures of inflation compensation had moved up considerably over the intermeeting period”—a comment that suggests five- to ten-year inflation may be on the rise.