The Fed surprised investors last week by adopting a more dovish tone regarding monetary policy than it has taken in the recent past. For example, the Fed indicated it is increasingly willing to be patient and take more of a wait-and-see approach regarding further interest rate increases. Investors cheered this relatively more accommodative Fed position, and were further encouraged by two strong economic developments during the week:
- The number of new jobs created in January vastly exceeded expectations. (January also marked the 100th consecutive month of job gains—a run that began in 2010.)
- Manufacturing activity, as measured by the ISM manufacturing index, increased significantly in January and also topped estimates.
That said, average hourly earnings fell short of expectations and initial jobless claims rose more than anticipated. Housing also continued to show weakness, with pending home sales falling despite expectations for an increase.
In Europe, a mixed bag saw the German Gfk Consumer Climate index post-better-than-expected results but German manufacturing comes in weaker than forecast. French consumer spending fell further than predicted, but consumer confidence levels in the country were surprisingly strong. Elsewhere, UK manufacturing activity disappointed while Spain’s GDP growth topped estimates.
In Asia, Japanese retail sales were more robust than anticipated (as was Australian inflation). However, Chinese manufacturing (as measured by the Caixin/Markit Manufacturing Purchasing Managers’ Index) fell even deeper into contraction territory than forecast–and South Korean industrial production was worse than expected.
The U.S. equity market enjoyed another week of solid returns. Energy stocks led the pack thanks to strength in crude oil prices and positive earnings results from “big oil” companies. Investors also favored interest-rate-sensitive/defensive areas of the market, such as consumer staples, following the dovish Fed comments and because of the growing viewpoint that the U.S. might be nearing the late stages of the economic cycle. Financials lagged most other sectors after outperforming in recent weeks. Consumer discretionary was the only sector that was negative last week, and it was down only slightly, after weaker-than-expected earnings results.
Overseas, European stocks lagged the U.S. market due largely to disappointing economic data. Additionally, many cyclical-oriented companies that reported earnings last week highlighted uncertainties in the global macro environment that weighed on their earnings outlooks.
Most Asian markets also lagged the U.S. For instance, the Japanese market seemed to take a somewhat cautious view toward its earnings season, although the market was buoyed later in the week following dovish statements by the Fed. China’s market was a notable outperformer, however, likely benefiting from the Fed’s comments as well as suggestions that significant progress is being made on a wide range of economic issues between the U.S. and China.
Emerging markets outperformed, particularly Latin America, as select countries like Brazil and Chile are benefiting from government policy improvements and strengthening economies.
In the fixed-income markets, longer-duration securities outperformed shorter-duration debt as the Fed’s comments helped push yields lower. High-yield bonds continued to rally, sparked by the more accommodative Fed and higher crude prices; however, high-yield healthcare bonds came under pressure after proposed changes to drug rebates re-emerged. Emerging markets sovereign and corporate credits also gained ground, although the Mexican peso fell for the first time in 10 weeks after news of a deceleration in the economy and the downgrade of Pemex, the Mexican state-run oil company.
GAIN: Active Asset Allocation
Global stocks posted another week of gains, driven by a combination of solid economic results, good corporate earnings growth and a statement by the Fed that it would be patient regarding future interest rate hikes. Stocks saw their best January results in several decades.
Liquidity conditions have also improved significantly, as institutional investors have increasingly taken on risk following their de-risking during the fourth quarter.
Our equity allocations were led by emerging markets and a rebound in small-cap stocks. However, positions in large-cap growth stocks and Japan dampened performance somewhat.
Bonds also posted gains for the week, with all sectors moving higher. Corporate fixed-income securities performed especially well, while shorter-duration bonds were flat. The fixed-income portfolios remain overweight to shorter-duration credits, with a focus on high-yield bonds and senior loans.
The Federal Reserve Board appears to be on pause for the time being in terms of interest rate policy, which suggests rates are likely to be relatively stable. We are exploring opportunities among emerging markets debt.
PROTECT: Risk Assist
Yet another strong week for global equity markets means that December’s losses are essentially wiped out. Volatility expectations fell last week after U.S. companies continued to report solid earnings results for the fourth quarter. In addition, trade talks between the U.S. and China went reasonably well and the jobs report for January was outstanding—with new job creation running at a much stronger rate than expected.
SPEND: Real Spend
The U.S. equity market closed out January with its best return since 1987—and both domestic and international stocks were up around 8% for the month. Meanwhile, bonds rose 0.7%, with much of that positive return occurring after the Fed’s dovish comments last week.
The return spread between global stocks and investment-grade bonds is tightening as stocks rally from their lows during the fourth quarter of 2018. Bonds continue to outperform over the short term—up 3.2% during the past three months, versus a 0.3% return for equities. Longer-term, however, the return for global stocks during the past three years is 11.8%, versus just 1.9% for bonds.
Domestic dividend-paying stocks outperformed the broader market last week, while international dividend stocks trailed international markets slightly. Interestingly, dividend stocks have nearly kept pace with the broader market so far this year—despite the fact that dividend stocks are typically more defensive investments that often perform well during volatile markets and sell-offs (such as those we saw during 2018).
Meanwhile, inflation expectations remain low, but have risen by more than 20 basis points year-to-date to around 1.9% (as measured by 10-year TIPs and 10-year Treasuries).
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