Economic data in the U.S. was mostly positive last week. Employment data—including changes in nonfarm payrolls and initial jobless claims—came in better than expected, as did industrial production and the University of Michigan’s consumer sentiment index. That said, retail sales and housing starts disappointed.
International economic data was uneventful, overall. For example, France, Germany and Japan all saw inflation results that were in-line with expectations.
U.S. stocks were down for the week due in part to concerns about the potential for a trade war between the U.S. and other nations. Interest-rate sensitive sectors such as utilities and REITs were the best performers as interest rates moderated. In contrast, materials and industrials companies underperformed on growth concerns.
Overseas, Asian markets outperformed as a proposed meeting between the U.S. and North Korea eased concerns about political tensions in the region. But emerging markets struggled on concerns over moderating economic growth.
In the fixed-income markets, long-duration U.S. bonds outperformed as interest rates fell (due partly to signs that inflation may not be overheating). Emerging markets bonds struggled, however, as fixed-income investors reduced their risk exposure.
GAIN: Active Asset Allocation
Equities were soft last week, giving back some of their recent gains despite any concrete negative developments or serious volatility. Growth investments once again outperformed value, while small-caps slightly outperformed large-caps (although both were negative for the week).
Domestic stocks have held up a bit better than international stocks on days when markets were down, suggesting that higher beta/risk exists in foreign markets.
Bond prices rose last week, with long-duration Treasuries performing best. We continue to prefer corporate credits and a shorter overall duration profile in the portfolios.
PROTECT: Risk Assist
Markets were generally calm last week from a volatility perspective. Despite political uncertainty involving the Trump administration, the CBOE Volatility Index (VIX) remained at around 15—somewhat below its longer-term average. This suggests that the market continues to expect more volatility than we saw last year, but nothing too drastic.
SPEND: Real Spend
U.S. Treasury yields bounced around last week, but ultimately ended near where they started. Global stocks and bonds posted roughly the same returns, with stocks just slightly outperforming bonds for the week. The one-year return spread between stocks and bonds remains at more than 18%, with global stocks up around 2% year to date and the broad-based bond market down around 2% for the year so far.
REITs enjoyed a strong week, up 1.4%, along with long-duration Treasuries (+1.3%). Preferred stocks lagged, coming in roughly flat for the week.
Inflation in February, as measured by the consumer price index, came in at 1.8% (excluding the volatile food and energy sectors) on a year-over-year basis. That was in-line with expectations, helping to calm investors’ fears of inflation overheating. Meanwhile, the producer price index (ex-food and -energy) came in at 2.7% year-over-year—also matching expectations. Investors will be closely following the Fed’s meeting this week to see if the Fed raises a key short-term interest rate as expected.
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