International Stocks Continue to Outrun U.S. Equities

The global economy continues to generate better-than-expected results, especially in Europe. Last week, industrial production data beat expectations in in France, Italy and the UK.

In the U.S., however, retail sales growth in December was slower than expected and the University of Michigan Consumer Sentiment Index—which measures consumer confidence—was weaker than anticipated.

Corporate earnings results for the fourth quarter of 2016 begin last week. Large banks—including Bank of America, Wells Fargo and J.P. Morgan—reported strong results on improving credit quality and higher trading profits.

GAIN: Active Asset Allocation

International stocks outpaced U.S equities for the third consecutive week, as U.S. stocks softened following a strong start to 2017. One reason: The U.S. dollar fell modestly, helping the performance of international markets. Emerging markets indices were particularly robust. That helped the Gain portfolios, which have direct exposure to emerging markets equities. We continue to emphasize small-caps and value stocks.

Interest rates fell for the fourth week in a row. Corporate fixed-income securities held up relatively well, and we continued to prefer corporate credit exposure relative to Treasuries.

PROTECT: Risk Assist

Last week was relatively mild from a risk mitigation perspective. Some of the recent so-called “Trump trades” that have occurred in the wake of the election result—including rising stocks, a rising dollar and falling bond prices—reversed their trends modestly. However, the Risk Assist portfolios have maintained their allocations and remain unhedged.

SPEND: Real Spend

Last week, equities struggled to maintain their strong returns of late while bonds remained relatively flat as well—with the yield on the 10-year U.S. Treasury hovering within 6 basis points for the week. Nonetheless, Real Spend portfolios have been helped by exposure to equities recently: Consider that U.S. large-company stocks have outperformed the broad U.S. bond market by more than 8 percent during the past three months.

Meanwhile, inflation continues to tick up slightly, with market prices suggesting a short-term inflation rate of around 2.2%. Once inflation (CPI) data for December is released this week, we will know the full-year 2016 inflation data—information that some retirees use to adjust their annual portfolios distributions.

All rebalancing in the Real Spend portfolios occurred early last week. In addition, some small changes to the portfolio’s holdings were made, including a replacement of a small position in a municipal bond ETF with a high-yield bond ETF.