Economic data out of the U.S. was mostly positive: Nonfarm payrolls, the ISM Manufacturing Index and initial jobless claims all came in ahead of expectations. One weak spot was a disappointing revised GDP growth rate for the first quarter of 2018.

In contrast, international economic data disappointed—with Manufacturing PMI in France and industrial production in Japan coming in below expectations.

In the U.S. equity market, technology stocks outperformed as investors shifted into growth-oriented assets. Real estate also outperformed following a spate of mergers and acquisitions announcements. Financials underperformed as interest rates softened.

Internationally, emerging markets India and Indonesia outperformed as investors recognized accelerating economic growth in those countries. Europe was the worst performing region, as fears about Italy’s new socialist government and its disdain for the European Union spooked investors.

In the fixed-income markets, long-duration bonds outperformed as interest rates fell. But emerging markets debt underperformed as investors continued to reduce risk in their fixed income portfolios.

GAIN: Active Asset Allocation
The holiday-shortened week was a choppy one as Italian election jitters pressured European stocks early in the week. Stocks ultimately rallied by the end of the week due to a strong jobs report and other generally positive U.S. economic data, as well as on news that the U.S./North Korea summit is back on after being canceled. Markets have been choppy for most of 2018 so far due to a combination of mixed economic data, earnings season and political uncertainty (especially following various tweets from the President).

U.S. equity markets have taken the lead in terms of performance, with small-caps and growth stocks continuing to show strong fundamentals and positive upward momentum.

The fixed-income markets were also choppy but ended the week close to where they started it. The bond yield tug-of-war continued to keep yield on the 10-year Treasury note trading in a narrow band. For example, the 10-year Treasury yield at one point fell toward the low end of its recent range as investors felt the economy and inflation might be softer than expected. But yields rose again on Friday following the better-than-expected jobs report, which caused many investors to predict the Fed would raise short-term interest rates at its next meeting later this month. We continue to favor corporate credits over Treasuries, while maintaining a shorter duration profile than the Bloomberg Barclays US Aggregate Bond Index.

PROTECT: Risk Assist
Financial markets were volatile for much of last week, due in large part to fears that Italy could potentially exit from the euro currency—a move that would be disastrous for European banks and financial markets.

Ultimately, however, those fears receded and investors cheered more positive developments about the economy—in particular, stronger-than-anticipated jobs report in the U.S. By week’s end, global equities were higher, interest rates were down slightly and expectations for future volatility had fallen sharply to approximately where they finished the previous week.

We updated our volatility forecasts last week, and our expectations for future volatility levels decreased.

SPEND: Real Spend
Global equity and fixed-income markets ended the week up slightly, despite volatility along the way. Year-to-date, broad-based bonds are down nearly 2% while global stocks are up 1.5%. Stocks’ excess return over bonds during the past 12 months is now more than 13%.

Investors chasing yield had a mixed week. REITs rose sharply (up 1.75%) as interest rates fell, and both preferred stocks and long-duration bonds posted small gains. Meanwhile, high-yield bonds were flat while emerging markets debt fell more than 1% for the week.

Market expectations for future inflation were fairly flat week-over-week, despite falling yields. The core PCE price index (the Fed’s preferred gauge of inflation) for April came in at 1.8% on a year-over-year basis—right in line with economists’ expectations. That puts core PCE just shy of the Fed’s 2% inflation target.

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