Equity markets continue to rise on a steady stream of stronger-than-expected economic results. Developments over the past two weeks or so include:
- The jobless rate in November fell to its lowest level since 2007
- The U.S. services sector in November grew at its fastest pace in a year.
- In the manufacturing space, new orders in October for U.S. factory goods rose at the fastest pace since January 2015 (with orders for durable goods rising by 4.6%)
Overseas, international markets shrugged off an anti-establishment vote in Italy that rejected the government’s plan for constitutional reform—a result that prompted the Italian Prime Minister to step down and fueled fears among some investors that Italy may exit the European Union. Meanwhile, the European Central Bank announced it would begin decreasing the pace of its quantitative easing program aimed at sparking economic growth.
GAIN: Active Asset Allocation
The broad market rally continued last week, with both U.S. and international indices moving higher. Small-cap stocks, value stocks and emerging markets performed especially well, and our positions in these market segments benefited our portfolios. We continue to see opportunities in these areas as 2016 comes to a close.
In the fixed-income market, interest rates crept higher again last week. In fact, the yield on the 10-year Treasury note has risen every week since the election. We have maintained our overweight position in corporate fixed-income securities via high-yield bonds and preferred stocks.
PROTECT: Risk Assist
As global markets rallied once again last week, measures of expected equity market volatility stabilized while measures of expected volatility in interest rates and currencies fell.
Risk Assist has been and continues to be positioned to participate in market gains, particularly in small-cap stocks.
SPEND: Real Spend
Real Spend’s overweight position in equities relative to other retirement income strategies has benefited the portfolios as the global equity market rally has continued, post-election. While Real Spend is acutely focused on income, it seeks to generate that income from two sources: fixed-income yield and equity market capital appreciation. This is a key distinction to keep in mind as interest rates creep higher.