Stocks Enter New Territory on Mixed Economic Data

As corporate earnings season continues, we’re seeing especially positive results from companies in economically cyclical sectors such as industrials and materials. Additionally, technology companies’ financial results are benefiting from strong microchip demand among automobile and smartphone makers.

Economic data in the U.S. was mixed last week, with stronger-than-expected manufacturing PMI (Purchasing Managers’ Index) results offset by higher-than-expected jobless claims and slower-than-anticipated growth of existing home sales.

European economic results were also mixed. Overall, Eurozone PMI came in better than expected, and GDP in the UK grew more than expected in the fourth quarter (2.1%)—but consumer confidence fell short of estimates.

GAIN: Active Asset Allocation

Equity market returns were strong across the board last week, with the Dow surpassing 20,000 for the first time and European stocks hitting their highest levels in almost 13 months. International markets and small-cap stocks lead the charge, outpacing domestic equities and large-company shares, respectively.

Recent trends in the fixed-income market continued, with interest rates rising slightly. We continued to maintain an overweight position in high-yield debt, which once again outperformed Treasury securities for the week.

We expect trends in both the equity and fixed-income markets to continue.

PROTECT: Risk Assist

We continue to find ourselves in an exceptionally low volatility environment, overall. The CBOE Volatility Index (VIX), which measures expected volatility over the next 30 days, recently stood at around 10, versus its long-term historical average of approximately 20. That suggests traders anticipate a calm market environment. Another measure of volatility, S&P 500 implied correlation, suggests low correlation for the next several months—traditionally a sign of muted market volatility.

SPEND: Real Spend

Stocks continue to outpace bonds, while international markets maintain their performance edge over domestic markets. Both these developments have been positive for the Real Spend strategy, which emphasizes equities and holds international investments. In fact, we recently increased the Real Spend portfolios’ allocation to international markets to be more in line with the asset allocation of the Gain and Protect portfolios.