There was plenty of new economic data for investors to parse last week. Some of it, such as core CPI (consumer inflation) was in-line with expectations. Other data came in higher than expected—for example, PPI and core PPI (wholesale inflation). A slightly-below-estimate reading was seen in the University of Michigan consumer sentiment index for July.

Overseas economic results were varied. The UK’s month-over-month GDP growth (a new measurement of GDP that was just introduced) met expectations, but industrial and manufacturing production data for May were worse than expected. Poorer-than-anticipated results were also seen from Germany’s ZEW economic sentiment index for July and Japanese industrial production for July. Among emerging markets, Brazil reported retail sales growth that topped expectations and China saw better-than-predicted export growth over the past 12 months.

The U.S. equity markets shook off concerns about global politics and tariffs for the week, with the technology and industrials sectors outperforming. In contrast, the utility sector underperformed as investors were more comfortable with riskier segments of the market. Additionally, signs of rising inflation caused some investors to worry that interest rates could rise more sharply than expected—a negative development for utilities and telecommunication stocks.

Internationally, European markets were generally higher for the week, shaking off trade and tariffs worries. Auto industry shares in Europe appreciated meaningfully. Japan also benefited from the lessening of trade-related concerns (as well as from the yen falling to a six-month low). Emerging markets advanced due to strong results from Brazil, India and Asia-Pacific markets—the first time in more than a month that emerging markets equities were positive for a given calendar week.

In the fixed-income markets, falling bond yields helped longer-duration U.S. government bonds outperform shorter-duration securities. Emerging markets debt also performed well for the most part. The South African rand and the Mexican peso both appreciated, helping to moderate currency markets. However, some other emerging markets currencies like the Turkish lira and Chinese renminbi experienced downside pressure.

GAIN: Active Asset Allocation
Another strong week for global equity markets means stocks are now up over 2% so far this quarter. The trends from the second quarter have re-established themselves as we head toward earnings season: Large-cap growth and momentum stocks have rallied strongly in recent weeks, and the portfolios continue to hold positions in both. That said, our European holdings have dragged on performance of late.

Our allocations remained unchanged last week, and we maintained a maximum equity exposure with an overweight to U.S. stocks and preference for growth stocks. Small-cap stocks are at a benchmark weighting.

Meanwhile, bonds were flat for the week. The yield curve continued to flatten, with the yield spread between the 2-year Treasury and the 10-year Treasury at 10-year lows. Although higher rates are eventually negative for the economy and stocks, it takes a few years for higher rates to suppress markets. Therefore, we believe it is too early to set off alarm bells—especially since the Federal Reserve Board is not likely to be extremely aggressive in raising interest rates.

Credit markets firmed up, with positive results from both investment-grade and high-yield debt. Other income-focused asset classes (including preferred stock and real estate) were soft, however.

PROTECT: Risk Assist
Volatility remained at relatively low levels last week, with the CBOE Volatility Index (or VIX) below 14. This suggests that the financial markets are becoming accustomed to a sustained high level of trade/tariff tensions, and may be more likely to rally on news of “renewed talks” between trade partners than fall on headlines of “additional tariffs” at this point.

The Risk Assist continue to maintain their current allocations; although, we have decreased our volatility forecast for this month.

SPEND: Real Spend
Several key gauges of inflation were released last week.

•    + Most notably, the consumer price index for June grew by 2.9% on a year-over-year basis—meeting economists’ expectations. (The month-over-month growth was slightly lower than anticipated.)
•    + Core CPI, which strips out the volatile food and energy sectors, came in at 2.3% year-over-year. This is roughly consistent with the Fed’s preferred inflation metric, the PCE index, which was up 2.0% at its latest reading.
•    + The producer price index, which is often seen as a leading inflation indicator, rose slightly more than expected in June—advancing 3.4% year-over-year.

Global equities outperformed the broad-based bond market last week by nearly 2%. Although international stocks struggled during the second quarter, global stocks are still outpacing bonds by more than 3% year-to-date.

Yield-focused investments had a mixed week. High-yield bonds and emerging markets debt were up, preferred stock was flat, and master limited partnerships fell sharply along with oil prices. So far this year, preferred stock has been the bright spot in the yield space—up around 2.5%.

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