U.S. Personal Income and Outlays – May 2018

Released Friday, June 29, 2018

downloads

Personal Income: +0.4% month-over-month (Cons: +0.4%), +4.0% year-over-year
Personal Consumption Expenditures: +0.2% month-over-month (Cons: +0.4%), +4.6% year-over-year
Core PCE Price Index: +0.2% month-over-month (Cons: +0.2%), +2.0% year-over-year
 Savings Rate: 3.2%, -0.6 percentage point (ppt) year-over-year

Quick Take:
Personal income rose +0.4% month-over-month in May, in line with economists’ estimates. Year-over-year personal income growth was +4.0%, up from +3.9% growth in April. Wages and salaries, which make up ≈50% of personal income, grew +4.9% year-over-year in May, up from +4.5% growth in April.

Real disposable income, an indicator of purchasing power, was up +0.2% month-over-month in May and rose +1.7% year-over-year, down from +2.0% growth in April. On a 6-month annualized basis, real disposable income was up +3.0% in May.

Nominal personal consumption rose +0.2% month-over-month in May, above economists’ expectations. Nominal personal consumption growth in May was driven by both services and goods consumption, which rose +0.1% and +0.4% month-over-month, respectively. Goods spending, which makes up approximately one-third of personal spending, rose +5.3% year-over-year in May, the second highest pace of growth in over six years. Real personal consumption was flat month-over-month in May after rising +0.3% in April and +0.6% in March. On a year-over-year basis, real personal consumption rose +2.3%, down from +2.6% in April.

While personal consumption came in below estimates in May, spending on household utilities held down month-over-month growth by -0.2 percentage points due to low electricity demand. However, spending remained healthy on the largest individual categories of personal consumption, including housing, healthcare, and financial services & insurance, which grew by +0.4%, +0.2%, and +0.5% respectively in May. With employee compensation and consumer spending both growing at a 4.6% year-over-year pace, the outlook for personal consumption growth remains sound on the back of a labor market exhibiting low unemployment and healthy job competition.

On the inflation side, month-over-month growth for the core PCE price index was +0.2% in May. Year-over-year growth was +2.0%, the highest pace of growth since April 2012. Core PCE inflation has risen by +0.2% in each of the last 6 months, and 6-month annualized growth was 2.3% as of May.

 

Global Balanced Portfolio Positioning Intra-Quarter Update as of 06/15/2018

Shifted Consumer Staples to an overweight within the U.S. equity allocation and modestly reduced U.S. Health Care overweight

We have reallocated within the Global Balanced strategy’s less economically-sensitive U.S. equity sector exposure, reflecting the evolution of the economic backdrop and opportunities created by recent market action. We increased our exposure to the Consumer Staples Sector and, to fund this increase, we reduced exposure to the Health Care Sector, our largest U.S. sector overweight. We have also taken this opportunity to rebalance portfolios.

Given the progress made thus far in the economic cycle, we believe maintaining exposure to less economically-sensitive U.S. sectors is warranted, and a shift in market conditions presented an opportunity to move back to an overweight in Consumer Staples. In January of 2017, we had reduced exposure to the U.S. Consumer Staples Sector to increase the economic sensitivity of the portfolio and reduce risks from rising interest rates. Since then, the U.S. Consumer Staples Sector has underperformed the broad U.S. market by more than 20 percentage points, and prior risks we saw for the Consumer Staples Sector have eased. Valuations for the Consumer Staples Sector have declined materially, and sentiment now seems overly negative toward the sector. U.S. interest rates have also risen, reducing a key risk to Staples. As investors refocus on fundamentals in the current environment of moderate economic growth, the Consumer Staples Sector offers stable earnings growth potential which should support positive relative returns.

Meanwhile, the U.S. Health Care Sector has provided strong absolute performance over the past year-and-a-half, roughly in line with the broad market, and it has materially outperformed in recent weeks following the announcement of the Trump administration’s Blueprint to Lower Drug Prices, which reduced some investor uncertainty toward the sector. We continue to have a very positive view toward Health Care, and it remains our largest U.S. sector overweight.

Overall, these allocation adjustments represented an opportunity to take advantage of recent market shifts, increase U.S. Consumer Staples to an overweight, and keep portfolios aligned with the economic backdrop without changing our aggregate target exposure to less economically-sensitive U.S. sectors in our equity allocation.

The most recent complete presentation can be viewed here.
Any portfolio characteristics, including position sizes and sector allocations among others, are generally averages and are for illustrative purposes only and do not reflect the investments of an actual portfolio unless otherwise noted. The investment guidelines of an actual portfolio may permit or restrict investments that are materially different in size, nature and risk from those shown. The investment processes, research processes or risk processes shown herein are for informational purposes to demonstrate an overview of the process. Such processes may differ by product, client mandate or market conditions. Portfolios that are concentrated in a specific sector or industry may be subject to a higher degree of market risk than a portfolio whose investments are more diversified.
Holdings, Sector Weightings and Portfolio Characteristics were current as of the date specified in this presentation. The listing of particular securities should not be considered a recommendation to purchase or sell these securities. While these securities were among WestEnd Advisors’ Global Balanced holdings at the time this material was assembled, holdings will change over time. There can be no assurance that the securities remain in the portfolio or that other securities have not been purchased. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities presently in the portfolio. Individual clients’ portfolios may vary.

U.S. Sector Portfolio Positioning Intra-Quarter Update as of 06/15/2018

Shifted Consumer Staples to an overweight and modestly reduced Health Care overweight

We have reallocated within the U.S. Sector strategy’s less economically-sensitive sector exposure, reflecting the evolution of the economic backdrop and opportunities created by recent market action. We increased our exposure to the Consumer Staples Sector and, to fund this increase, we reduced the portfolio’s exposure to the Health Care Sector, the strategy’s largest sector overweight. We have also taken this opportunity to rebalance portfolios.

Given the progress made thus far in the economic cycle, we believe maintaining exposure to less economically-sensitive sectors is warranted, and a shift in market conditions has presented an opportunity to move back to an overweight in Consumer Staples. In January of 2017, we had reduced exposure to the Consumer Staples Sector to increase the economic sensitivity of the portfolio and reduce risks from rising interest rates. Since then, the U.S. Consumer Staples Sector has underperformed the broad U.S. market by more than 20 percentage points, and prior risks we saw for the Consumer Staples Sector have eased. Valuations for the Consumer Staples Sector have declined materially, and sentiment now seems overly negative toward the sector. U.S. interest rates have also risen, reducing a key risk to Staples. As investors refocus on fundamentals in the current environment of moderate economic growth, the Consumer Staples Sector offers stable earnings growth potential which should support positive relative returns.

Meanwhile, the Health Care Sector has provided strong absolute performance over the past year-and-a-half, roughly in line with the broad market, and it has materially outperformed in recent weeks following the announcement of the Trump administration’s Blueprint to Lower Drug Prices, which reduced some investor uncertainty toward the sector. We continue to have a very positive view toward Health Care, and it remains our largest sector overweight.

Overall, these allocation adjustments represented an opportunity to take advantage of recent market shifts, increase Consumer Staples to an overweight, and keep portfolios aligned with the economic backdrop without changing our aggregate target exposure to less economically-sensitive sectors.

The most recent complete presentation can be viewed here.
Any portfolio characteristics, including position sizes and sector allocations among others, are generally averages and are for illustrative purposes only and do not reflect the investments of an actual portfolio unless otherwise noted. The investment guidelines of an actual portfolio may permit or restrict investments that are materially different in size, nature and risk from those shown. The investment processes, research processes or risk processes shown herein are for informational purposes to demonstrate an overview of the process. Such processes may differ by product, client mandate or market conditions. Portfolios that are concentrated in a specific sector or industry may be subject to a higher degree of market risk than a portfolio whose investments are more diversified.
Holdings, Sector Weightings and Portfolio Characteristics were current as of the date specified in this presentation. The listing of particular securities should not be considered a recommendation to purchase or sell these securities. While these securities were among WestEnd Advisors’ U.S. Sector holdings at the time this material was assembled, holdings will change over time. There can be no assurance that the securities remain in the portfolio or that other securities have not been purchased. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities presently in the portfolio. Individual clients’ portfolios may vary.

Global Equity Portfolio Positioning Intra-Quarter Update as of 06/15/2018

Shifted Consumer Staples to an overweight within the U.S. allocation and modestly reduced U.S. Health Care overweight

We have reallocated within the Global Equity strategy’s less economically-sensitive U.S. sector exposure, reflecting the evolution of the economic backdrop and opportunities created by recent market action. We increased our exposure to the Consumer Staples Sector and, to fund this increase, we reduced exposure to the Health Care Sector, our largest U.S. sector overweight. We have also taken this opportunity to rebalance portfolios.

Given the progress made thus far in the economic cycle, we believe maintaining exposure to less economically-sensitive U.S. sectors is warranted, and a shift in market conditions presented an opportunity to move back to an overweight in Consumer Staples. In January of 2017, we had reduced exposure to the U.S. Consumer Staples Sector to increase the economic sensitivity of the portfolio and reduce risks from rising interest rates. Since then, the U.S. Consumer Staples Sector has underperformed the broad U.S. market by more than 20 percentage points, and prior risks we saw for the Consumer Staples Sector have eased. Valuations for the Consumer Staples Sector have declined materially, and sentiment now seems overly negative toward the sector. U.S. interest rates have also risen, reducing a key risk to Staples. As investors refocus on fundamentals in the current environment of moderate economic growth, the Consumer Staples Sector offers stable earnings growth potential which should support positive relative returns.

Meanwhile, the U.S. Health Care Sector has provided strong absolute performance over the past year-and-a-half, roughly in line with the broad market, and it has materially outperformed in recent weeks following the announcement of the Trump administration’s Blueprint to Lower Drug Prices, which reduced some investor uncertainty toward the sector. We continue to have a very positive view toward Health Care, and it remains our largest U.S. sector overweight.

Overall, these allocation adjustments represented an opportunity to take advantage of recent market shifts, increase U.S. Consumer Staples to an overweight, and keep portfolios aligned with the economic backdrop without changing our aggregate target exposure to less economically-sensitive U.S. sectors.

The most recent complete presentation can be viewed here.
Any portfolio characteristics, including position sizes and sector allocations among others, are generally averages and are for illustrative purposes only and do not reflect the investments of an actual portfolio unless otherwise noted. The investment guidelines of an actual portfolio may permit or restrict investments that are materially different in size, nature and risk from those shown. The investment processes, research processes or risk processes shown herein are for informational purposes to demonstrate an overview of the process. Such processes may differ by product, client mandate or market conditions. Portfolios that are concentrated in a specific sector or industry may be subject to a higher degree of market risk than a portfolio whose investments are more diversified.
Holdings, Sector Weightings and Portfolio Characteristics were current as of the date specified in this presentation. The listing of particular securities should not be considered a recommendation to purchase or sell these securities. While these securities were among WestEnd Advisors’ Global Equity holdings at the time this material was assembled, holdings will change over time. There can be no assurance that the securities remain in the portfolio or that other securities have not been purchased. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities presently in the portfolio. Individual clients’ portfolios may vary.

U.S. Industrial Production – May 2018

Released Friday, June 15, 2018

downloadsIndustrial Production: -0.1% month-over-month (Cons: +0.2%); +3.5% year-over-year
Manufacturing Production: -0.7% month-over-month (Cons: +0.0%); +1.7% year-over-year
Capacity Utilization: 77.9% (Cons: 78.1%); (78.1% prior month)

Quick Take:
Headline industrial production decreased 0.1% month-over-month in May, which was below economists’ estimates of a 0.2% increase. Mining production rose 1.8% month-over-month and utilities production rose 1.1%. Manufacturing production fell 0.7% in May as motor vehicles and parts production was disrupted by a fire at a major parts supplier. Excluding the impact of this event, manufacturing production declined 0.2%.

Year-over-year growth in headline industrial production was 3.5% in May, down from 3.6% growth in April. Mining production grew 12.6% year-over-year, up from 11.2% growth in the prior month. Utilities production was up 4.0% on a year-over-year basis, lower than April’s 5.4% pace of growth.  Mining production accounts for ~15% of total industrial production volume but drove over half of year-over-year headline growth in May.

While year-over-year headline industrial production growth remains above its average of 2.0% since 2010, the recent acceleration in growth has been driven by the mining industry, which reached its highest pace of year-over-year growth since 2012 in May. Manufacturing production, which is more impactful from an economic growth perspective, has declined in three of the first five months of 2018. While activity was held down by disruptions to the motor vehicle and parts supply chain, manufacturing production still moved lower on a month-over-month basis when excluding motor vehicles and parts. On a six-month annualized basis, manufacturing production was only up 1.3% as of May.

Notable Data:
In May, durable manufacturing decreased 1.2% month-over-month as motor vehicles and parts production fell 6.5% month-over-month. In April, motor vehicles and parts production declined 2.2%. Non-durable manufacturing decreased 0.1% month-over-month in May due to declines in food, beverage, and tobacco production (-0.2% month-over-month) and petroleum and coal products production (-1.1% month-over-month).

Capacity utilization for headline industrial production fell to 77.9% in May from 78.1% in April, while capacity utilization for manufacturing declined to 75.3% from 75.9%.