Cautious Investors Look to Defensive Sectors

In the fixed-income markets, long-duration securities underperformed shorter-duration issues as interest rates rose. (Rising rates hurt the prices of long-dated bonds more than prices of short-term bonds.) High yield bond performance, while lackluster, was better than that of long-term Treasuries. Emerging markets debt was mostly weak, with the Mexican peso and Chinese yuan continuing to depreciate. However, the Turkish Lira and Brazilian Real were positive offsets among emerging markets currencies.

GAIN: Active Asset Allocation

Equity markets were choppy again last week as investors navigated developments involving third-quarter earnings results, the upcoming midterm elections and the possibility of slower global economic growth.

Value stocks have outperformed growth stocks in recent months, after an extended period of underperformance. The portfolios are currently neutrally weighted to growth and value, but we are carefully monitoring for signs suggesting that value’s recent lead is solidifying. The portfolios are slightly overweight to domestic equities overall and U.S. large-caps, in particular. While large-company stocks have been more stable than small-company stocks lately, international equities have been more of a mixed bag—with Japan and Latin America showing relative strength, and Europe and emerging markets somewhat weak.

Bonds were down modestly last week as rates rose slightly. Bonds have posted losses during the past three quarters and are in negative territory so far this quarter. Corporate credits have been volatile, due largely to equity market swings. Some technical and performance indicators for corporates are showing signs of weakness lately.

PROTECT: Risk Assist

Although the global equity markets were essentially flat for the week, volatility was significant and volatility expectations remain very high for stocks. In contrast, bonds and currencies have relatively low levels of expected volatility.

There was no activity in the Risk Assist portfolios for the week. We will update our volatility forecasts this week due to recent market conditions.

SPEND: Real Spend

Despite being flat for the week, equities managed to outperform broad-based bonds—which are down nearly 1% quarter-to-date even in the wake of the stock market volatility seen so far this October.

Small-caps, value and preferred stocks fared the best last week, while large-cap domestic growth was the worst performing market segment. In the yield space, most fixed-income was down for the week—particularly high-yield bonds and investment-grade corporates. In contrast, preferred stock was up nearly 1%—and equity yield plays posted relatively strong returns, led by domestic REITs (up nearly 3%).

Horizon Investments is a participant in the ETF Strategist Channel.