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Latest Market Volatility Affects Stocks

Prices on U.S. goods and services have generally been rising at roughly the pace investors expected, according to the latest inflation data released last week. For example:

  • CPI (which measures consumer inflation) rose by 2.3% during the 12 months through September—just slightly lower than anticipated.
  • Core CPI, which excludes the often-volatile food and energy sectors, was up 2.2% year-over-year—in line with estimates.
  • Additionally, the PPI (which measures the wholesale costs of goods and services) was up 2.6% over the past 12 months, as expected.
  • The one outlier: The cost of goods imported into the U.S. rose much more than expected.

In Europe, German industrial production disappointed—but the same indicator in the UK exceeded expectations, helping the continent as a whole beat estimates. Other UK data—such as GDP growth and manufacturing production—fell short of forecasts, however. In Asia, a mixed bag: Chinese import growth was weaker than expected, while Japan’s PPI was higher than predicted. Meanwhile, Australian business confidence topped estimates while the country’s home loan growth disappointed.

Global equity markets saw significant losses and volatility last week, fueled largely by the previous week’s sharp rise in U.S. interest rates that prompted investors to reassess their outlook for the economy and the equity markets. In the U.S., market indices suffered their worst weekly returns since March.  Defensive sectors such as utilities and consumer staples fared best, while cyclical sectors such as materials and industrials were the weakest performers.

European equity markets also tumbled, as concerns about Italy’s budget continued and after Germany cut its growth expectations. Japanese stocks also suffered in the wake of U.S. market losses and as more investors began to fear the negative effects that a trade war could potentially have on corporate earnings.

In contrast, emerging markets outperformed most developed markets—with Brazil and Turkey leading the way. However, China slumped on concerns about its GDP growth and Argentina was a notable underperformer for the week.

In the fixed-income markets, long-duration bonds outperformed shorter-duration securities after rates eased. High-yield bonds fared the worst, given investors’ overall risk-averse behavior. Emerging markets debt performance was down marginally; while the Mexican peso and Chinese yuan depreciated, the Turkish lira and Argentinian peso rose.

GAIN: Active Asset Allocation
Our equity positions were down last week in the wake of global equity market losses. There were few sectors exempt from the extensive sell-off, with only the most defensive sectors outperforming the broad markets. For example, utilities and consumer staples held up relatively well (just as they did during the market dip back in February).

The portfolios have been repositioned over the past month to limit tracking error.  Growth and value weightings are now neutral, and the overweights to small-caps and domestic equities have been reduced. As third-quarter corporate earnings season ramps up, we will be watching for signs that businesses are concerned about trade tariffs and the potential for slower global economic growth.

Interest rates did not fall as much as might be expected given the extent of the stock market decline. Treasury securities outperformed equity-like fixed-income as well as corporate credits and real estate. That said, credit did better than expected.

PROTECT: Risk Assist
Global equity markets experienced sizable losses last week, along with sharply higher volatility (The VIX—which measures expected future volatility—soared more than 40% week-over-week). That said, the equity sell-off was far more concentrated in U.S. stocks than in international markets. The Risk Assist portfolios’ international exposure—which we recently increased—helped to moderate losses somewhat.

In market environments like the one we saw last week, some context can be helpful. The S&P 500 ended the week down more than 5% from its all-time closing high. While that is certainly enough to get investors’ attention, it doesn’t even put the index in correction territory—which is commonly defined as a 10% decline from a recent high.

SPEND: Real Spend
Last week’s global stock market losses affected the Real Spend portfolios. International holdings fared the best, while fixed-income holdings (including high-yield bonds) were flat.

In the yield space, most fixed-income assets (including high-yield bonds) were flat to slightly up. However, equity-based yield plays lost ground—with domestic dividend-paying investments down nearly 4%. International REITs fared the best, but were still down approximately 1.5% to 2% on the week.

After such a volatile week, it’s important to remember that Real Spend is designed for the long-term goal of spending in retirement

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