Economic data in the U.S. continued to keep investors happy last week. Initial jobless claims came in lower than expected, consumer confidence was higher than anticipated, both manufacturing PMI and personal spending beat estimates, and unemployment fell to a 17-year low.
Internationally, economic data was more mixed. Japan reported better-than-expected industrial production, while the UK’s manufacturing PMI exceeded expectations. Conversely, we saw disappointing manufacturing PMI results from Russia, China and the European Union.
Shares of energy companies were the best performers in the U.S. equity markets, due to stronger-than-expected corporate earnings driven by higher oil prices. Technology stocks also performed well as tech companies’ earnings beat estimates. However, telecommunications firms underperformed for the week, as recent earnings reports showed them struggling to generate growth.
Internationally, Asian emerging markets outperformed as emerging markets currencies appreciated and global economic data impressed. In contrast, Latin American shares struggled for the week. Disappointing earnings from several large Brazilian companies dragged down performance.
In the fixed-income markets, long-duration bonds outperformed as long-term interest rates moderated during the week. Municipal bonds lagged, due to uncertainty about potential tax law changes that could threaten these bonds’ interest deductibility.
Last week saw plenty of news—including a stream of corporate earnings results for the third quarter, the release of a new tax bill from Congress, and the announcement of a new chairman of the Federal Reserve Board.
Despite all that, financial markets were mostly calm as investors took these new developments in stride. Equities were generally positive, with international markets once again outperforming the U.S. market. We maintain our exposure to foreign stocks and increased the strategy’s exposure to Japan. We continue to prefer large-caps over small-caps, but are equally balanced between growth and value.
The fixed-income markets saw longer-duration bonds outpacing shorter-duration issues. We continue to prefer corporate credits, due in part to equity market stability.
As markets continue to drift higher amid low volatility, Risk Assist portfolios remain positioned to capture gains if they continue to be available. We modestly reduced our exposure to international markets.
Even as realized volatility continues to be exceptionally low, it strikes us as unusual that the VIX—a gauge of expected future volatility—remained below 10 last week given three significant events: the announcement of the next Federal Reserve Board chairman, the release of the administration’s tax plan details, and the latest unemployment report.
Global equities slightly outpaced the broad fixed-income markets last week, and the year-to-date spread between global stocks’ returns and the broad-based bond market’s returns remained around 18%.
In the Real Spend portfolios, international holdings, large-cap growth, and large-cap dividend-paying stocks were the best performers for the week. Small-cap stocks and high-yield corporate credit positions were the worst.
Market expectations for inflation fell slightly during the week, following rates lower, and ended the week at around 2.25%.
Yield-chasing investors benefited from a rebound in long-duration bonds as rates fell. REITs were also positive for the week. Master limited partnerships (MLPs) were extremely volatile—they fell more than 2% on Thursday alone—but ended up slightly.