Markets Sputter Along as Economic Data Disappoints

By Horizon Investments
Last week saw several disappointing economic developments globally. Here in the U.S., inflation, retail sales, consumer sentiment and industrial production all came in below expectations. Overseas markets also saw disappointing results among Germany’s ZEW Survey (which measures economic optimism levels) and inflation data, as well as Japanese machine orders and Chinese money supply growth.

The Federal Reserve Board raised the federal funds target interest rate last week and maintained its forecast for one more interest rate increase this year. The Fed also maintained its balance sheet reinvestment operations and laid out a plan to reduce the size of that balance sheet, stating that it could put the plan into effect relatively soon.

In the U.S., financials (including banks and REITs) outperformed. Technology was the worst-performing sector, as fears of overvaluation fueled the continued tech stock sell-off, followed by metals and mining companies. On balance, however, market indices were relatively flat.

Internationally, emerging Asian markets and Australia performed well—driven largely by an absence of bad news compared to the rest of the world. Meanwhile, the so-called BRIC countries (which include emerging markets Brazil, Russia and China) were hardest hit as investors became more risk-averse during the week.

In the fixed-income arena, U.S. long-term bonds (including government and corporate issues) were top performers for the week, driven in part by weaker-than-expected economic data. International bonds suffered as sovereign debt concerns once again emerged.

GAIN: Active Asset Allocation

Global stocks have been jittery during the past few weeks, as investors have become increasingly nervous about economic and geopolitical concerns. Last week, international stocks lagged the U.S. equity market while small-caps underperformed large-company stocks. Stocks with the strongest price momentum sold off the most, due in part to institutional investors’ efforts to protect their on-paper gains as the end of the second quarter approaches.

Meanwhile, bonds were up for the week as the increase in perceived equity risk prompted investors to favor relatively stable fixed-income assets.