A mixed week for the U.S. economy. On the plus side:

•   +  The ISM non-manufacturing index (which measures business activity in the services sector) came in better than expected.
•   +  Durable goods orders for April were in line with forecasts.
•   +  Initial jobless claims more or less matched expectations.

In contrast, factory orders fell short of expectations and continuing claims for unemployment benefits were higher than anticipated.

Overseas, industrial production in both Germany and France was poorer than expected, and Japan’s GDP growth in the first quarter was weak. But PMI data in the UK exceeded expectations and Australian GDP beat expectations.

In the U.S. equity market, consumer discretionary stocks outperformed due in part to recent positive economic developments such as low unemployment and strong consumer confidence. Additionally, previous concerns about a “retail apocalypse” have abated as more companies have improved their offerings in ways that enable them to better compete with the likes of Amazon.

Internationally, European markets were mixed. There was a notable weakness in Italy as investors remained uncomfortable with the country’s new government. However, Spain’s market performed well, as investors viewed the country’s pro-EU government and relatively stable economy positively. Argentina’s stock market got a boost after the country struck a $50 billion bailout deal with the International Monetary Fund. However, Brazil underperformed as its currency—the Brazilian real—fell significantly and as rumors of government graft and corruption resurfaced. Emerging market equities were flat overall.

In the fixed-income markets, shorter-duration U.S. bonds outperformed as interest rates increased. Emerging markets debt underperformed as macro uncertainty persisted, prompting investors to reduce exposure to the asset class.

GAIN: Active Asset Allocation
Global stocks rallied last week, benefiting the equity portfolios. We have shifted the portfolios to an overweight position in U.S. stocks—in contrast to the first four months of 2018, when we had an overweight allocation to emerging markets and foreign equities.

The primary drivers for the repositioning are the strength of the U.S. dollar and the relative stability of the U.S. stock market.

Small-cap allocations, in particular, have been positive for the portfolios.

Positions in European equities have dragged on the portfolios, but we should have better insight this week into the direction of European interest rates and the potential for a stronger euro. If the European Central Bank begins pulling back on its economic stimulus program, it will be a sign that European economies are progressing nicely.

Bond prices were generally down for the week, as the yield on the 10-year U.S. Treasury note rose back toward the psychologically important 3% mark. The move higher in rates hurt our longer duration corporate bond allocations, but was generally beneficial for shorter duration fixed-income securities and corporate credit positions.

PROTECT: Risk Assist
Emerging markets saw significant volatility last week, particularly in Latin America as currency issues began to percolate there. This caused volatility expectations across other equity markets to rise throughout the week as investors worried about potential ripple effects.

This week will see several events that could potentially move markets—including a summit between the U.S. and North Korea, and monetary policy meetings held by both the Federal Reserve Board and the European Central Bank. As always, we monitor the portfolios daily and will update our volatility forecasts mid-month if appropriate.

SPEND: Real Spend
Global stocks had a strong week, up more than 1%. Bonds were down slightly (-0.3%) as the yield on the 10-year U.S. Treasury note rose about two basis points to end the week around 2.95%.

Year-to-date, global stocks remain the outperformer, while bonds are down. Additionally, the return spread between global equities and bonds over the past year is nearly 15%—with bonds down 1% during that period (and down 3% in real, inflation-adjusted terms). We continue to caution against the overuse of fixed-income in investment portfolios, as rising rates will create a headwind for bonds.

This week we should see more clarity on the future direction of rates, as well as new inflation data. Week-over-week market expectations for inflation were fairly flat, with longer-term (five-year) expectations around 2.4%.

Yield-focused investors saw positive signs overall, with preferred stocks leading the way in the fixed-income category. High-yield bonds followed. High-yield equity investments also fared well: U.S. REITs and master limited partnerships were up for the week, while long-duration bonds were down.

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