The U.S. once again enjoyed generally stronger-than-expected economic news last week—with initial jobless claims, durable goods orders and factory orders all beating expectations. International economic data was more mixed, however. While European GDP growth, UK construction PMI and German factory orders were all better than anticipated, German industrial production softened.
The U.S. equity market rose modestly for the week. Financial services stocks were top performers. Banks, in particular, benefited from rising interest rates and optimism about the likelihood that a Congressional tax bill will eventually become law. Retail stocks also performed well, as holiday sales data came in better than expected.
However, commodity-related sectors under performed due to weakness in the price of metals and oil.
Internationally, Brazil outperformed as its central bank eased its monetary policy in an effort to boost the country’s economic growth. In contrast, China under performed due to continued concerns about the Chinese government restricting access to credit.
In the fixed-income markets, long-duration U.S. Treasury securities outperformed due to falling interest rates. Municipal bonds also outperformed, as investors scrambled for the bonds in advance of potential changes to U.S. tax policy that could eliminate some muni bonds’ tax advantages in the future. High-yield bonds under performed for the week, following equity markets lower.
GAIN: Active Asset Allocation
Global stocks softened last week, as investors seem to be rebalancing out of many of 2017’s top-performing asset classes. Emerging markets and growth stocks were especially weak.
We remain bullish on equities; however, we are monitoring the performance spreads between various market sectors and asset classes. Currently, we are neutrally weighted between growth stocks and value stocks.
In our fixed-income portfolios, we continue to prefer corporate credits. For the week, corporate bonds were up; although, high-yield corporate bonds were flat.
PROTECT: Risk Assist
Stocks were somewhat choppy and ended the week up slightly. That said, expectations for future volatility ultimately fell as traders set up for a quiet end to 2017 in terms of global equities and bonds.
SPEND: Real Spend
Global equity markets were flat with the broad-based fixed-income market last week, leaving the year-to-date spread between stock returns and bond returns at approximately 19%.
Inflation remains low. Inflation measures in recent weeks have come in at or below market expectations, and inflation has been at or below the Fed’s inflation target for more than five years. The low numbers of late have been keeping long-term rates low, contributing to a flattening yield curve.
What’s more, expectations for future levels of inflation remain low (at around 2.3% for five-year inflation). The Fed this week will release its inflation forecast, which should provide some insight into the Fed’s future inflation targets.
In the yield space, preferred stocks were the best performers last week along with municipal bonds. Some components of the new tax bill would remove tax advantages for many municipal bonds. That, in turn, would likely reduce the supply of munis next year by up to one third—and result in prices for current issues of municipal bonds being driven higher. Meanwhile, REITs and MLPs were down week over week.
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