It was another week of solid economic data in the U.S., including:

• Both the ISM Manufacturing and Non-Manufacturing indices significantly exceeded forecasts.
• Average hourly earnings exceeded all estimates of all those surveyed by Bloomberg, posting the largest annual gain in wages since the last recession.
• Initial jobless claims came in lower than expected and nonfarm payrolls exceeded forecasts—two indications that the job market remains robust.

That said, the unemployment rate—although remaining low and at the previous month’s level–fell short of expectations. Additionally, factory orders came in below consensus estimates.

In Europe, German Services and Manufacturing PMI indices, as well as industrial production, failed to meet estimates. In the UK, a more mixed bag—with Services PMI exceeding forecasts but Manufacturing PMI falling short. Switzerland was a notable bright spot, with higher-than-expected GDP growth and stable unemployment rates.

Asian economic data was light last week. Australia’s GDP exceeded expectations, but retail sales figures missed estimates. In Japan, robust capital spending exceeded expectations while in India, GDP was stronger than expected. Meanwhile, China’s Caixin/Markit Manufacturing and Services PMIs disappointed.

In the U.S. equity market, the consumer staples and industrial sectors outperformed. Consumer staples stocks benefited from what seems to have been a rotation out of momentum/high-growth companies into what is a more stable sector with pockets of relatively lower valuations. Industrials stocks got a boost from stronger U.S. macroeconomic data and analyst upgrades. However, technology shares suffered as investors considered the risks of elevated valuations and the potential regulatory pressures on the sector. Energy shares also fell. Some operators in the oil patch were surprised by a slowdown in North American activity; additionally, oil prices ebbed.

European markets endured another down week as trade war worries continued to grip the investment landscape. Technology shares in Europe were the worst performers, with luxury-oriented sectors not far behind as investors began to worry about a slowdown in China. Japanese shares suffered as well on trade-related uncertainties, as NAFTA agreements have yet to materialize between the U.S. and Canada combined with negative implications from the trade war between the U.S. and China.

Emerging markets performance continued to be abysmal—by some definitions, emerging markets equities have entered a bear market—as contagion fears, combined with the escalation of the China-U.S. trade battle, spooked investors. That said, Latin American markets–particularly Argentina and Brazil—gained ground, helping to recoup the previous week’s losses.

In the fixed-income market, shorter-duration and high-yield debt outperformed longer-duration issues as rates rose in the wake of more signs of economic strength. Emerging markets debt declined again after the majority of emerging markets currencies continued their retreat. On the positive side, the Argentine peso and Turkish lira both appreciated for the first time in many weeks.`

GAIN: Active Asset Allocation
A rough week for investors, as both stocks and bonds lost ground to start September. Although being fully invested in stocks was a drag on the portfolios last week, our positions in small-caps and our overweight to domestic equities were beneficial. Foreign stocks were pushed lower largely by emerging markets, which continued to come under pressure due to concerns about trade, currencies, inflation and other factors.

We have been looking for signs of weakness and profit taking in the market, and saw some of that occurring last week. Equities often struggle in September as many traders return from summer vacations and become more actively engaged. We will keep a close watch on the markets and the portfolios, with an eye toward further risk reduction if necessary.

PROTECT: Risk Assist
Global equities were choppy and ended the week modestly lower. Volatility expectations rose slightly for equities: The VIX ended the week around 15, up from just below 13 a week ago. Re-ignited trade fears, particularly involving the U.S. and China, drove much of that rise. Our view is that positive trade news on Canada, Europe and Japan may be likely over the coming weeks, accompanied by negative news regarding China.

SPEND: Real Spend
Both global equities and broad-based bonds fell together last week—an unusual development, as stocks and bonds are typically uncorrelated or even negatively correlated. Surprisingly high wage inflation data pushed interest rates higher (pushing down bond prices) while trade war fears hurt stock prices.

In the Real Spend portfolios, higher-quality stocks and dividend-growth shares performed the best. International holdings and preferred stock performed the worst.

Average hourly earnings data released last week came in higher than expected, as noted. Such wage inflation is usually seen as a precursor to overall price inflation. However, market expectations for price inflation remained little-changed week-over-week. In the coming days, CPI data for August will provide more insight into the direction of aggregate prices.

Both high-yield equity and fixed-income assets were down for the week—with preferred stocks, convertibles and long-duration bonds performing the worst. Domestic dividend stocks were the only yield-focused asset class that posted flat to small gains for the week.

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