HI Market Notes header for 4302018

U.S. economic data was positive across the board last week. We saw better-than-expected results in key areas of the economy, including:

  • + first quarter GDP
  • + new and existing home sales
  • + consumer confidence and consumer sentiment
  • + manufacturing PMI
  • + durable goods orders
  • + wholesale inventories
  • + initial jobless claims

Internationally, economic data was mixed. Japanese industrial production was much better than expected, but Eurozone manufacturing PMI and UK GDP growth disappointed.

In the U.S. equity market, interest rate-sensitive sectors such as REITs and utilities outperformed for the week as investors anticipated a softening of interest rates. Industrial stocks were the worst performers for the week: Aerospace and defense fell the most as global tensions eased following the meeting of North and South Korean leaders.

Overseas, interest rate-sensitive real estate stocks outperformed on expectations for lower interest rates. European equities (especially financials) underperformed, also due to interest-rate expectations.

In the fixed-income markets, longer-duration Treasuries outperformed as interest rates peaked following a recent run up and then softened by the end of the week. International bonds, especially emerging markets debt, underperformed as investors worried about the impact of a strengthening dollar.

GAIN: Active Asset Allocation

Most equity markets around the globe were flat to down last week, and there was some additional realized volatility due to earnings season. The markets are trying to digest some new signs of inflation and a surprisingly strong GDP report.

Overall, U.S. and broad-based international markets posted roughly the same returns. In the U.S., large-company stocks beat small-caps for the week, while value outperformed growth. Bonds had an equally uneventful week, with very little separation between the returns of various fixed-income sectors.

One noteworthy exception was the U.S. dollar, which gained 1.3% for the week, due in part to rising bond yields.

PROTECT: Risk Assist

Markets were relatively quiet last week. Volatility expectations fell as strong corporate earnings announcements and signs of reduced tensions between North Korea and South Korea helped remove some uncertainty. For example, the CBOE Volatility Index (VIX) ended the week at around 15—lower than its long-term historical average.

The Risk Assist portfolios continue to be modestly de-risked, and we will be updating our volatility forecasts during the coming week.

SPEND: Real Spend

Global stocks and broad-based bonds posted similar returns last week, and both asset classes were roughly flat for the week. Over the past 12 months, well-known global stock indices have outpaced bond indices by more than 15%.

Yield-focused investments were volatile. Long-duration bond prices were hit hard early in the week as the yield on the 10-year U.S. Treasury hit 3%, but then reversed course to end the week up slightly. Equity-based yield plays like REITs and infrastructure did well, while preferred stocks and emerging markets bonds lost ground.

This week, the Fed’s preferred measure of inflation–core PCE–will be released, and should offer insight into how the most conservative of the various inflation gauges looks in light of the surprisingly good GDP number Friday.

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