By Horizon Investments

The Fed surprised investors last week by adopting a more dovish tone regarding monetary policy than it has taken in the recent past. For example, the Fed indicated it is increasingly willing to be patient and take more of a wait-and-see approach regarding further interest rate increases. Investors cheered this relatively more accommodative Fed position, and were further encouraged by two strong economic developments during the week:

  • The number of new jobs created in January vastly exceeded expectations. (January also marked the 100th consecutive month of job gains—a run that began in 2010.)
  • Manufacturing activity, as measured by the ISM manufacturing index, increased significantly in January and also topped estimates.

That said, average hourly earnings fell short of expectations and initial jobless claims rose more than anticipated. Housing also continued to show weakness, with pending home sales falling despite expectations for an increase.

In Europe, a mixed bag saw the German Gfk Consumer Climate index post-better-than-expected results but German manufacturing comes in weaker than forecast. French consumer spending fell further than predicted, but consumer confidence levels in the country were surprisingly strong. Elsewhere, UK manufacturing activity disappointed while Spain’s GDP growth topped estimates.

In Asia, Japanese retail sales were more robust than anticipated (as was Australian inflation). However, Chinese manufacturing (as measured by the Caixin/Markit Manufacturing Purchasing Managers’ Index) fell even deeper into contraction territory than forecast–and South Korean industrial production was worse than expected.

The U.S. equity market enjoyed another week of solid returns. Energy stocks led the pack thanks to strength in crude oil prices and positive earnings results from “big oil” companies. Investors also favored interest-rate-sensitive/defensive areas of the market, such as consumer staples, following the dovish Fed comments and because of the growing viewpoint that the U.S. might be nearing the late stages of the economic cycle. Financials lagged most other sectors after outperforming in recent weeks. Consumer discretionary was the only sector that was negative last week, and it was down only slightly, after weaker-than-expected earnings results.

Overseas, European stocks lagged the U.S. market due largely to disappointing economic data. Additionally, many cyclical-oriented companies that reported earnings last week highlighted uncertainties in the global macro environment that weighed on their earnings outlooks.

Most Asian markets also lagged the U.S. For instance, the Japanese market seemed to take a somewhat cautious view toward its earnings season, although the market was buoyed later in the week following dovish statements by the Fed. China’s market was a notable outperformer, however, likely benefiting from the Fed’s comments as well as suggestions that significant progress is being made on a wide range of economic issues between the U.S. and China.

Emerging markets outperformed, particularly Latin America, as select countries like Brazil and Chile are benefiting from government policy improvements and strengthening economies.

In the fixed-income markets, longer-duration securities outperformed shorter-duration debt as the Fed’s comments helped push yields lower. High-yield bonds continued to rally, sparked by the more accommodative Fed and higher crude prices; however, high-yield healthcare bonds came under pressure after proposed changes to drug rebates re-emerged. Emerging markets sovereign and corporate credits also gained ground, although the Mexican peso fell for the first time in 10 weeks after news of a deceleration in the economy and the downgrade of Pemex, the Mexican state-run oil company.

GAIN: Active Asset Allocation

Global stocks posted another week of gains, driven by a combination of solid economic results, good corporate earnings growth and a statement by the Fed that it would be patient regarding future interest rate hikes. Stocks saw their best January results in several decades.

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