Week in Review
Just before noon Eastern Time, Apple became the first US company to reach a $1 trillion market capitalization (PetroChina, a state-controlled Chinese oil and gas company, briefly reached $1 trillion in 2007 before quickly falling below the mark).
The milestone came just two days after Apple beat earnings expectations and delivered stronger-than-expected guidance for the remainder of 2018. Some analysts have become wary of the company’s lofty valuation, but many agree there is no discernible difference between Apple being valued at $999.9 billion and $1 trillion – this is just a nice, round number (which tends to carry extra weight with most people).
While much of the market’s focus was on the race to $1 trillion, Friday’s monthly employment report flew somewhat under the radar. Although it missed most economists’ expectations (only 157,000 jobs were added in July, compared to the anticipated 190,000), the overall labor market remains strong.
The silver lining was that the previous two months’ jobs reports were revised higher by a total of 59,000. Average hourly earnings also increased by 2.7% year over year, matching expectations. Unemployment dropped from 4.0% to 3.9%, while the labor force participation rate remained steady, which indicates that a larger percent of the working population is finding full-time jobs. Despite the headline number missing expectations, employment continues to be a bright spot in the US economy.
Strong earnings and economic data reports have continued to offset geopolitical risks (namely tariffs) in recent weeks. However, it is still important to remember to include a broad range of asset classes in your portfolio for more-consistent and more-stable longer-term results, rather than chasing short-term returns. While the day-to-day noise can tempt investors into making knee-jerk decisions, we need to stay committed to our long-term financial goals. Maintaining a disciplined investment strategy can help reduce market noise and increase the odds of a successful outcome over time.
Chart of the week
Apple launched the initial public offering (IPO) of its stock on December 12, 1980 at a price of $22 per share. The stock has split four times since the company went public, bringing the split-adjusted price of the IPO down to $0.39 per share. Had someone invested $1,000 in Apple when the company went public, their investment would be worth $533,308 today (not including dividends). While this is an astounding figure, the chart below illustrates a majority of this growth has come only since 2001, when Apple introduced the iPod.
*Chart created with Google Finance
Broad equity markets finished the week mixed as US large-cap stocks gained while international stocks suffered. S&P 500 sectors were mixed; defensive sectors broadly outperformed cyclical sectors.
So far in 2018, technology, consumer discretionary and healthcare have been the strongest performers, while telecommunications, consumer staples and materials have lagged.
Commodities were negative as oil prices fell by 0.29%. This was the fifth straight week of oil-price declines as trade concerns weighed on the market, causing anxieties about future demand. While oil prices have been trending higher since the OPEC-led output cuts in January 2017, potential rising production and falling demand has caused some investors to worry about oversupply in the near term.
Gold prices slipped by 0.69% as an upbeat assessment of the US economy by the Federal Reserve and new trade tensions between the US and China boosted the US dollar. The strengthening dollar has put downward pressure on gold in recent months, making the metal more expensive for foreign investors.
The 10-year Treasury yield fell slightly from 2.96% to 2.95%, resulting in positive performance for traditional US bond asset classes. Yields climbed above 3% briefly, but slipped lower as trade tensions between the US and China escalated later in the week.
High-yield bonds were positive for the week as most riskier asset classes experienced gains. As long as the economy remains healthy, we expect higher-yielding bonds to continue outperforming traditional bonds in the long run as the risk of default is moderately low.
Asset class indices are mixed so far in 2018. US small-cap stocks have led while traditional bond categories have lagged.
Lesson to be learned
The emotional burden of trading is substantial; on any given day, I could lose millions of dollars. If you personalize these losses, you can’t trade. “
– Bruce Kovner
Investing can trigger many emotions – even for the most seasoned professionals. However, if you want to be a successful investor, you have to disconnect your feelings from what’s happening in the market. By sticking to an emotion-free, disciplined investment strategy, you can increase the odds of success in the long-term.
FormulaFolios has two simple indicators that can help you measure the health of the economy. The first indicator is the Recession Probability Index, or RPI, and the second is the US Equity Bear/Bull Indicator, which tells us whether the US stock market is strong (bull) or weak (bear).
The RPI reading should ideally be on the lower end on a scale of 1 to 100., while the US Equity Bull/Bear Indicator reading should ideally be at least 67% bullish. When these two readings are at their ideal levels, our research shows that market conditions are at their strongest and least volatile.
The RPI currently registers 24.00, forecasting further economic growth with no warning of recession risk at this time. The US Equity Bull/Bear indicator is currently 66.67% bullish and 33.33% neutral. This means the indicator believes there is a slightly higher-than-average likelihood of stock-market gains in the near term (within the next 18 months).
The Week Ahead
The upcoming week will be quiet compared to recent past weeks as the quarterly earnings season begins to wind down and economic data releases are relatively minimal.
More to come soon. Stay tuned.
Derek Prusa, CFA, CFP®
Senior Market Analyst