By Horizon Investments

Economic data out of the U.S. last week was upbeat: Housing starts, retail sales and industrial production all came in ahead of expectations. One disappointment was initial jobless claims, which were higher than anticipated.

In contrast, overseas economic data was generally disappointing. Germany’s ZEW survey (a measure of economic expectations), Russian industrial production and European CPI (inflation) failed to meet expectations.

The financials sector led the U.S. equity market, benefiting from rising interest rates that can help boost financials’ profits. Industrials also outperformed after reporting strong first-quarter earnings. However, consumer staples was the worst performing U.S. market sector due to fears of slowing growth and deteriorating profitability resulting from input cost inflation. Real estate also suffered as interest rates rose.

Internationally, European equities outperformed following strong earnings reports from several economically sensitive industrial companies. Emerging markets underperformed as global political and economic policy uncertainty prompted investors to reduce their risk.

In the fixed-income markets, emerging markets bonds outperformed as investors sought higher yielding securities. Long-duration Treasuries were the worst performers, hurt by rising interest rates.

First-quarter earnings season got underway last week, creating significant separation between various sectors of the U.S. equity market based on reported financial results. While stocks were generally flat overall, the energy and consumer discretionary sectors posted strong gains. In contrast, consumer staples and technology were down for the week.

We continue to emphasize global equities, despite some headline risk. However, we shifted portfolio allocations toward developed international markets and away from emerging markets. Likewise, we rotated away from U.S. large-cap stocks and into U.S. small-caps.

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