Economic news in the U.S. was generally positive last week. GDP growth for the fourth quarter of 2016 was revised higher, to 2.1%, and a key reading of consumer confidence came in much better than expected—hitting its highest level in more than 16 years. However, the Federal Reserve’s preferred gauge of inflation showed prices in February rose by 2.1% on a year-over-year basis—the first time the yearly rate of inflation exceeded 2% since March 2012.
Energy companies were top performers last week, as fears about OPEC’s continuation of oil production cuts subsided. Financials, especially banks, also posted gains as politicians in Washington, DC turned their attention toward regulatory reform in the financial services sector. In contrast, the utilities sector and gold underperformed as investors shifted away from defensive, “safe” assets.
Internationally, economic reports out of Europe were also positive–with the German business climate and Italian manufacturing confidence both beating expectations. Latin American stock markets followed commodity prices higher, while Chinese stocks underperformed due to fears about governmental financial curbs on the real estate sector.
In the fixed-income markets, high-yields bonds were the top performers as they benefited from rising commodity and stock prices. International government bonds underperformed, due mainly to weakness in the Japanese bond market over concerns about the Bank of Japan’s decision to continue its accommodative monetary policy in April.
GAIN: Active Asset Allocation
U.S. stocks bounced back last week from the volatility they experienced in the wake of the failed attempt to replace the Affordable Care Act, and easily outpaced foreign stocks during the final week of the first quarter. In general, last week saw a reversal of the previous week—with value outperforming growth as the financial services and energy sectors gained ground.
Overseas, we continue to maintain a direct position in emerging markets due to their performance and the outlook for that asset class.
Meanwhile, bond prices rose, led by corporate credits and high-yield bonds. The Gain portfolios’ overweight to credit remains in place.
PROTECT: Risk Assist
Global equities moved higher last week, while volatility pressed lower. In that environment, Risk Assist portfolios remained positioned to capture those gains. Within the portfolios, however, we made some modest adjustments:
- Increase exposure to Europe and emerging markets
- Reduce exposure to U.S. small-company stocks and large-company value stocks
These moves to increase international exposure reflect that the Trump administration may face headwinds from Congress as it seeks to implement its agenda, which in turn could potentially dampen the performance of certain domestic asset classes.
Risk Assist’s flexibility to hedge selectively was beneficial during the quarter, as we were able to position the portfolios to participate in the generally positive results from global markets.
SPEND: Real Spend
Real Spend’s equity-based approach to retirement income was beneficial during the quarter, as stocks handily outpaced bonds. All Real Spend portfolio models will be rebalanced to their maximum spending reserve allocations this week.
It’s important to note that while inflation expectations rose marginally over the quarter, inflation risk remains largely under control in the current environment.
