Political Uncertainty Sends Stocks Lower, Bonds Higher
The U.S. economy’s health remains mixed, according to data released last week. While initial jobless claims rose more than expected, for example, new home sales for February were much stronger than anticipated. Overseas, European Union consumer confidence was higher than expected, while both retail sales and inflation (CPI) in the UK rose more than expected.
Overall, equities were down for the week while bond prices rose. Concerns about the passage of Republicans’ health-care bill caused investors to worry that the Trump administration may have difficulty implementing some of its other economic policies. Interest-rate-sensitive sectors such as utilities and real estate performed well as political uncertainty pushed interest rates lower. However, falling rates caused the U.S. financial services sector to struggle, as investors feared lower rates could potentially dampen banks’ profits.
Meanwhile, emerging markets were strong performers. Emerging market currencies continued to appreciate relative to the dollar, which moved lower due to political concerns in the U.S.
In the bond market, falling interest rates helped long-duration bonds outperform shorter-duration fixed-income securities for the week. Investment-grade corporate credits held up well, but lower-rated securities (which took their cues from the equity market) were relatively weak.
GAIN: Active Asset Allocation
Global equities declined last week, led lower by U.S. stocks. Meanwhile, the U.S. dollar weakened relative to a broad basket of currencies for the third consecutive week. Expectations for global growth and interest rate hikes got ahead of themselves, disappointing investors.
Oil continued its recent weakness, putting pressure on value stocks. We remain overweight growth stocks, due in part to the decline in oil prices of late.
Bonds were positive on the week, as falling interest rates pushed bond prices higher. The corporate bond holdings in the portfolios were also positive, but high-yield bonds fell along with stocks and oil prices. Currently, we are reviewing our high-yield positions in the portfolios.
PROTECT: Risk Assist
Last week saw the first trading day since last October in which stocks fell by more than 1%. Concerns about the prospects for the Republican-backed ACA replacement health-care bill created uncertainty among investors about the Trump administration’s ability to enact other parts of its economic agenda going forward. However, there was no follow through nor signs of investors entering into new hedges either during or following the decline.
SPEND: Real Spend
Fixed income outpaced U.S. equities last week, as U.S. stocks pulled back in the wake of rising political uncertainty. It was only the 3rd week this year—albeit the 2nd consecutive week—that fixed income (as measured by the Bloomberg Barclays Aggregate Bond index) outperformed domestic stocks (S&P 500).
That said, Real Spend portfolios also maintain a moderate exposure to international equities, which outpaced domestic stocks for the week and year-to-date.