A big week, economically, as GDP for the second quarter of 2018 was released. The economy during the quarter grew by 4.1%—just shy of estimates. However, consumer spending (which accounts for approximately 70% of the economy) rose during the quarter more than expected. New auto purchases and health care expenses were key drivers of robust spending among consumers. Other U.S. economic news was mixed, with manufacturing PMI exceeding estimates but services PMI coming in weaker than forecasted.

Overseas, German manufacturing PMI was better than expected, and the country’s business climate index was slightly stronger than anticipated. In contrast, softer-than-expected results were seen in French services PMI, GDP and consumer spending growth. Meanwhile, on the inflation front, CPI in Australia was below expectations while core CPI in Japan was higher than predicted.

It was a busy earnings week for U.S. companies. The technology and consumer discretionary sectors underperformed in the wake of relatively weak earnings and guidance about the future financial results. The top-performing sectors were energy and industrials, as trade war tensions between the U.S. and Europe receded. Better-than-expected earnings from key companies in those sectors also drove their outperformance.

Internationally, European markets outperformed thanks to a joint statement between U.S. and European leaders suggesting that a possible trade war between the two regions may be averted. Emerging markets were even stronger—posting their best weekly performance since May—as strong earnings, a weaker U.S. dollar and reduced trade tensions helped buoy the asset class.

In the fixed-income markets, shorter-duration U.S. government-issued securities continued to outperform longer-duration issues. Emerging markets debt also performed well as the U.S. dollar weakened relative to most emerging markets currencies.

GAIN: Active Asset Allocation
Markets gyrated as the second-quarter earnings season hit its stride last week, as companies reported mixed results, and as GDP for the second quarter was released. Overall, the data led to a reversal of recent trends—meaning that, for the week, foreign equities outperformed domestic equities, value outperformed growth, and large-caps outpaced small-caps.

We adjusted the portfolios’ equity allocations to their lowest international weights in two years. We expect more volatility as we progress through earnings season, and we anticipate domestic stocks should remain strong through the end of summer. The portfolios remain overweight to growth stocks and continue to have a small-cap allocation.

Bonds came under pressure last week. Our positions in corporate credits held up well, but our real estate and preferred stock positions trailed our high-yield corporate debt holdings. Our research continues to support preferred stock, real estate and high-yield positions—along with a barbell of long-term Treasuries to reduce volatility on choppy days for the equity markets.

PROTECT: Risk Assist
Expectations for market volatility remained subdued across all asset classes and geographies last week, even in the face of ever-present headlines about trade and tariff issues between the U.S. and other nations.

The Risk Assist portfolios shifted their allocations slightly, reducing exposure to value equities in favor of growth equities while also reducing some Asia-focused exposure and adding to U.S.-focused assets. The portfolios’ current allocations to U.S. equities are at their highest levels since the third quarter of 2016.

SPEND: Real Spend
Global stocks were up slightly last week, driven largely by second-quarter corporate earnings results. Broad-based fixed-income markets once again lagged global stocks and are down more than 1.5% for the year (and down 1% during the past 12 months). Perhaps even more important: With headline inflation coming in at 2.9% on a year-over-year basis, the real return for bonds is nearly -4% over the past 12 months. We believe that an effective strategy to fight inflation risk is overweighting toward equities with long-term growth potential–not using inflation-protected bonds.

The Real Spend equity portfolios currently have a 70% allocation to domestic equities. As a reminder, the allocations generally follow the longer-term views from our asset allocation process.

In the yield space, returns for the week were mixed. Long-duration bonds fell more than 1% as concerns about the potential for rising rates around the globe (in Japan, especially) spooked bond investors, while master limited partnerships were up more than 1.5% on higher oil prices. Emerging markets debt and high-yield bonds were up modestly, while preferred stocks and REITs were down modestly.

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