It was a mixed week for economic data, and markets reacted accordingly, with U.S. equities up slightly and Europe and Japan lagging. For the U.S., it was the fifth straight week of positive returns.
On the downside, factory orders disappointed, missing expectations, and jobless claims were up more than expected, though they remained low by any historical measure. The better news: crude inventory levels were lower than anticipated and the U.S. trade imbalance showed some improvement. Fed Chairman Powell continued to showcase his new market awareness in an early week conversation with President Trump, calming markets by sticking to the investor-friendly “data-driven” policy script.
Around the world economic data was mixed as well with German Industrial Production and Factory Orders both falling, while in the U.K. the BRC retail sales monitor showed strength in the face of the relentless Brexit mess. On the continent, the European-wide Services PMI exceeded expectations. Holidays in Asia meant that many data points there were limited. Still, Japan reported that month-over-month household spending climbed more than anticipated, a positive for investors, even as concerns over a slowdown in China and the up and down China-U.S. trade talks continued to dominate news out of the region.
In U.S. markets, the Utilities and Technology sectors led the pack, with investors pushing Treasury prices up and yields down. Tech stocks benefited from reports that the semiconductor cycle may be nearing a bottom. Energy and Materials were pressured by the drop in crude prices and the ongoing concern over global growth, as well as analyst downgrades.
Slowdown fears continued to play out in Europe, with the European commission predicting declining growth both this year and next. Cyclicals were again weak, as Autos were hit by the now familiar trade talk worries. Healthcare outperformed, as did Technology. Emerging markets, which had been a bright spot, gave back some gains. India was an exception, with the markets there turning positive following an unexpected cut in interest rates by the central bank.
On the credit side, high yield bonds continued to recover lost ground. Emerging markets sovereign debt saw losses as local market currencies declined versus the dollar, while emerging markets corporates were up for the week. Things were, in a word, mixed.
GAIN: Active Asset Allocation
Global stocks retreated modestly on the week, losing ground for the first time in 2019. This was not unexpected as some consolidation was needed following a strong start to the year.
In the U.S. equities were up modestly, extending their recovery off the December lows. In China, some markets were closed for the Lunar New Year’s holiday, potentially contributing to the weak readings for global stocks. Meanwhile, the trade talks between China and the U.S. continued to grind forward, with meetings between senior representatives of both countries planned for this week. Europe, bedeviled by Brexit uncertainty and trade concerns, was also down modestly on the week.
Bonds were higher and rates moved lower all along the yield curve as fixed income markets continued to adjust to the idea that the Fed is done tightening for the time being. The U.S. dollar strengthened. From a strategy perspective, the portfolios currently have exposure to credit and maintain a shorter duration compared to the benchmark. We continue to monitor our fixed income allocations and duration exposure, given our outlook on the Fed.
PROTECT: Risk Assist
In spite of all the surrounding noise, volatility has remained low with the CBOE Volatility Index (VIX) trading between the high 15s and the low 16s during the week. A continued drop in volatility would impact how quickly the Risk Assist portfolios would continue to re-risk.
SPEND: Real Spend
Inflation remained subdued and interest rate sensitive asset classes like Utilities were up on the week. Investment grade corporate bonds were also modestly positive while emerging market sovereign debt was down. MLPs generally lost ground as oil prices fell.
Dividend stocks continued to add value to overall market returns. Over the past year, some domestic dividend indexes have significantly outpaced both the S&P 500 and the S&P Value indices, highlighting their defensive value in periods of market volatility. Investment grade bonds were another strong performer on a trailing 12-month basis, up 3.2% compared to a one percent return for global equities.
The longer-term tells a different story: global stocks returned 13.4% over the last three years compared to 1.75% for investment grade bonds.
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