Investors last week digested higher long-term interest rates, which rose on rumors of global central bank tightening due to better-than-expected economic data. For example, the U.S. services sector rose at a surprisingly rapid pace—its best showing in 11 months—while U.S. factory orders also exceeded expectations and job creation in September remained strong.
Financial services firms, especially banks, benefited in that environment, as higher interest rates are expected to enhance their profitability. Meanwhile, interest rate-sensitive sectors such as REITs and other high-yielding stocks were hurt as rates rose.
Overseas, economic announcements were also positive. The manufacturing sectors in major European countries such as Germany, France and the UK all posted better-than-expected results (as measured by the Purchasing Managers’ Index, or PMI). August factory orders in Germany also were stronger than anticipated.
In the UK, the pound fell to its lowest level in more than 30 years, while stocks in the UK closed at a record high (as measured by the FTSE 100 index). Investors expect the weaker pound to benefit UK exporters.
Emerging markets outperformed globally for the week, helped by a cut in India’s central bank policy rate and by better-than-expected manufacturing results in China.
GAIN: Active Asset Allocation
We are preparing for higher volatility leading up to the election. We have repositioned the Gain portfolios by emphasizing growth stocks, which we believe may offer greater stability in the current environment relative to value stocks and higher-yielding assets.
In addition, we believe that international equities’ valuations may have run ahead their fundamentals for the moment. We have reduced some of our direct emerging markets exposure based on these short-term dynamics.
PROTECT: Risk Assist
Global equities continued their “sideways drift,” trading in a relatively narrow range last week. However, a material rise in interest rates—brought on by a growing belief among investors that the Fed could raise rates later this year and some rumors that the European Central Bank may begin to reduce bond purchases in the future—lead to slightly higher overall market volatility.
We re-positioned the Risk Assist portfolios to become slightly more defensive by increasing exposure to U.S. growth stocks, which currently have a lower beta (meaning they are less volatile than the overall market) than do value stocks. In addition, we increased allocations to U.S. defensive market sectors.
We are tactically positioned for slightly higher volatility going forward, although we do not expect to see especially strong or worrisome levels of volatility.
SPEND: Real Spend
Real Spend portfolios were rebalanced back to their respective maximum spending reserve levels, which range from 9% to 21%. Each model is capped at three years’ worth of spending, which has been shown to be sufficient to sustain any drawdown period that has occurred during the past 90 years.