U.S. Economic Strength Helps Domestic Equities Outperform

By Horizon Investments

Key inflation data for the month of July was released last week. Core inflation (as measured by the consumer price index) was mostly in line with expectations, while wholesale inflation in July (as measured by the producer price index) came in lower than anticipated. Meanwhile, initial jobless claims for the previous week were lower than expected.

Overseas, German industrial production was weaker than forecast while UK GDP data for the second quarter was mostly in line with expectations (although second quarter business investment in the UK exceeded expectations.)

In Asia, Japan’s GDP for the second quarter was better than predicted, as was month-over-month household spending. Meanwhile, inflation in China was mostly in line with expectations and the pace of home loans in Australia slowed.

Many U.S. equity market sectors were down for the week, with real estate and consumer staples hit particularly hard. Real estate suffered losses after rumors of tenant bankruptcies reminded investors of the potential risks in the sector. Some of the weakness in consumer staples was due to Wall Street downgrades of companies in the sector and the potential for sector consolidation being questioned by the market.

On the plus side, the consumer discretionary sector outperformed as retailers reported strong earnings and as investor sentiment toward the industry continues to improve. The telecommunication sector also outperformed as second-quarter earnings results and future guidance beat expectations.

European financial markets came under pressure, particularly shares of financial companies with ties to Turkey—where economic conditions are becoming increasingly concerning to investors. Emerging markets continued to underperform as the pressures of Turkey and the Turkish lira spooked investors—resulting in weakness in many other emerging markets. One exception was the Chinese equity market, which outperformed for the week.

In the fixed-income markets, longer-duration issues outperformed high-yield and shorter-duration securities. Emerging markets debt underperformed as emerging markets currencies continued to weaken (particularly the Turkish lira). That said, parts of Asia (such as Thailand) were relatively resilient.

GAIN: Active Asset Allocation

Global equity markets began the week looking promising, but experienced volatility and losses on Friday as the Trump administration directed new tariffs at Turkey. The last two weeks have seen outperformance from U.S. equities after some international equity strength during the previous weeks.