Stocks March Higher, Bonds Fall as Investors Regain Appetite for Risk

NEWS OUTLETS SEEM to be spitting out new headlines on a second-to-second basis. From tax reform to foreign policy, what does it all mean for you? Continue reading for  a quick overview of recent market activity and affects on your Gain, Protect, and Spend investment platforms, written by third-party money manager, Horizon Investments.

Week of September 18, 2017

Stocks March Higher, Bonds Fall as Investors Regain Appetite for Risk

Overall, the global economy continues to show signs of strength. U.S. economic data last week was positive—with better-than-anticipated results in terms of inflation and initial jobless claims. Likewise, international economic results were generally positive. Japanese machine orders, Italian industrial production and UK inflation were all better than expected.

Financial services stocks led the U.S. equity market higher last week, benefiting from interest rates that bounced higher from their recent lows. The energy sector also outperformed, as expectations of stronger global demand pushed energy prices higher. In contrast, softening prices for metals caused precious metals and mining stocks to under-perform.

Meanwhile, developed international markets outperformed. Specifically, the European financials sector followed interest rates higher, while shares of Japanese industrial companies were boosted by the strong machine orders news. Emerging markets, especially in Asia, underperformed for week as China reported disappointing economic data.

In the fixed-income markets, corporate credits outperformed in the wake of positive equity market results. Long-duration Treasury bonds suffered the worst performance as interest rates rose sharply. Prices of such bonds are especially sensitive to changes in rates.

GAIN: Active Asset Allocation
As geopolitical tensions eased, global financial markets continued to march higher last week. In the U.S., all three major indices hit new highs.

We continue to favor global stocks, while also maintaining a slight overweight to the aerospace and defense sector as potential downside protection against volatility that could result from North Korean military action.

The yield on the 10-year U.S. Treasury note rose by about 10 basis points last week, causing bond prices to fall, as investors began anticipating the Federal Reserve Board’s policy meeting later this week. The Gain portfolios’ fixed-income allocations remain overweight to foreign corporate debt.

PROTECT: Risk Assist
Volatility once again remained extremely low among most major asset classes last week. Concerns about continued aggression by North Korea faded as attention turned to the two natural disasters in the southeast section of the U.S. The federal relief package, coupled with the resolution of the debt ceiling issue and growing interest in a bipartisan tax reform package, also helped volatility fall.

With an upward trend in place for the equity market, Risk Assist portfolios remain fully invested in an effort to capture any future gains.

SPEND: Real Spend
With interest rates up sharply last week, broad-based fixed-income markets significantly underperformed global equities—bucking the recent trend of relative strength for bonds. Volatility subsided in most major markets and asset classes, and mid-cap and small-cap stocks both performed well last week.

In the wake of that performance, the year-to-date spread between global stocks and bonds increased and now exceeds 14%.

Long-duration bonds were hit hard last week as interest rates rose. Prices of bonds with long durations are most sensitive to spikes in interest rates.

Meanwhile, inflation (as measured by the CPI) rose by 1.9% in August on a year-over-year basis—up from 1.7% in July. More importantly, August was the first time since February that the CPI came in ahead of economists’ estimates.

Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This report does not attempt to examine all the facts and circumstances that may be relevant to any company, industry or security mentioned herein. We are not soliciting any action based on this document. It is for the general information of clients of Horizon Investments, LLC (“Horizon”). This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this document, clients should consider whether the security in question is suitable for their particular circumstances and, if necessary, seek professional advice. Investors may realize losses on any investments.
Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. This commentary is based on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions expressed herein are our opinions as of the date of this document. We do not intend to and will not endeavor to update the information discussed in this document. No part of this document may be (i) copied, photocopied, or duplicated in any form by any means or (ii) redistributed without Horizon’s prior written consent.
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