Economic data out of the U.S. last week was upbeat: Housing starts, retail sales and industrial production all came in ahead of expectations. One disappointment was initial jobless claims, which were higher than anticipated.
In contrast, overseas economic data was generally disappointing. Germany’s ZEW survey (a measure of economic expectations), Russian industrial production and European CPI (inflation) failed to meet expectations.
The financials sector led the U.S. equity market, benefiting from rising interest rates that can help boost financials’ profits. Industrials also outperformed after reporting strong first-quarter earnings. However, consumer staples was the worst performing U.S. market sector due to fears of slowing growth and deteriorating profitability resulting from input cost inflation. Real estate also suffered as interest rates rose.
Internationally, European equities outperformed following strong earnings reports from several economically sensitive industrial companies. Emerging markets underperformed as global political and economic policy uncertainty prompted investors to reduce their risk.
In the fixed-income markets, emerging markets bonds outperformed as investors sought higher yielding securities. Long-duration Treasuries were the worst performers, hurt by rising interest rates.
GAIN: Active Asset Allocation
First-quarter earnings season got underway last week, creating significant separation between various sectors of the U.S. equity market based on reported financial results. While stocks were generally flat overall, the energy and consumer discretionary sectors posted strong gains. In contrast, consumer staples and technology were down for the week.
We continue to emphasize global equities, despite some headline risk. However, we shifted portfolio allocations toward developed international markets and away from emerging markets. Likewise, we rotated away from U.S. large-cap stocks and into U.S. small-caps.
In the fixed-income markets, bond prices fell for the week as growing inflation fears pushed interest rates higher. We maintained a relatively short duration profile in the portfolios, which was beneficial. That said, our holdings in foreign bonds dragged on returns.
PROTECT: Risk Assist
Last week was relatively calm for global equities, despite some selling pressure on Friday. The CBOE Volatility Index (VIX)—which measures expected future levels of market volatility—at one point fell to its lowest level in approximately a month.
The Risk Assist portfolios remain modestly de-risked. However, as with the Gain portfolios, the Risk Assist portfolios increased their allocations to developed international markets (away from emerging markets) and U.S. small-caps (away from U.S. large-caps).
SPEND: Real Spend
Bond yields rose across the yield curve last week, causing bond prices to fall. Global stocks outperformed broad-based fixed-income once again, bringing the return spread between the two asset classes over the past 12 months to 18% in favor of equities.
Bonds suffered mainly because rising commodity prices put upward pressure on inflation and inflation expectations. Recently, market expectations for future long-term inflation have risen by nearly 15 basis points, to around 2.5%.
In the yield space, longer-duration bonds were hurt worst (as rising yields have a bigger impact on long bonds). Longer-duration Treasuries and corporates were down more than 1% and 2%, respectively, for the week. REITs also followed bonds lower. However, master limited partnerships were buoyed by rising oil prices and ended the week up more than 3% while global infrastructure was up slightly.
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