US stocks edged higher during a relatively quiet week, building on the strong start to June. Markets began the week on positive footing on news the US and Mexico reached a deal to avoid new tariffs, easing some of the trade concerns which have weighed on markets since early May. With the agreement in place, investor focus shifts back to the ongoing US-China trade war. President Trump and Chinese President Xi Jinping are expected to meet at the G-20 Summit later this month.

While it was a light week of economic reports, retail sales provided a boost to investor confidence on Friday. This is an important indicator as it reflects consumer spending, which is a major driver behind GDP growth. Following a weak first quarter in 2019, retail sales grew a solid 0.5% in May, and April’s figures were surprisingly revised higher. The upbeat data suggests helps alleviate concerns of a slowing economy following the previous week’s lackluster jobs report.

With a second consecutive week of gains, the S&P 500 continued to claw back from its May losses, bringing the index within 2% of its all-time-high closing level. However, recent weeks illustrate how important it is to stay committed to a plan and maintain a well-diversified portfolio. While stocks have been volatile since early May, other asset classes (such as gold, REITs, and bonds) have experienced more steady, positive performance.

Flashy news headlines can make it tempting to make knee-jerk decisions, but sticking to a strategy and maintaining a portfolio consistent with your goals and risk tolerance is imperative for long-term success. Including a broad mixture of asset classes can help with achieving more consistent long-term results, smoothing the short-term market noise and making it easier to weather these common volatility storms.

 

Chart of the Week

In recent weeks, gold has rallied to break into fresh 14-month highs. The $1,350/oz level was last breached in April of 2018. Gold, as a safe haven asset class, typically performs best when there is heightened volatility in the market or when geopolitical factors remain uncertain. Boosted by a bout of investors turning more defensive, gold has rallied over 4.5% since the beginning of May. President Trump and President Xi of China are expected to meet with hopes of some positive trade news following their meeting at the upcoming G-20 Summit. As investors ramp up gold purchases, it is important to note that gold has not successfully maintained a breakout above the $1,350 level since September of 2010.

*Chart source: Bloomberg

 

Market Update

Equities

Broad equity markets finished the week mixed as small-cap US stocks fared better than international stocks. S&P 500 sectors were also mixed, with no clear trend between defensive and cyclical sectors.

So far in 2019, technology and real estate are the strongest performers while healthcare has been the worst performing sector.

Commodities

Commodities were negative for the week as oil prices decreased by 2.74% to $52.51/bl. The fall in prices came as the International Energy Agency (IEA) reduced their estimate of global oil demand for the second consecutive month. This further supports investor concerns about a global economic slowdown amidst heightened geopolitical tensions and deteriorating manufacturing data. The price of oil has been extremely volatile this year as initial supply worries due to global sanctions drove prices up.

Gold prices fell by 0.08%, closing the week at $1,340.10/oz. Although gold fell slightly, the metal has rallied over 4.5% since early May. The increase in prices comes as investors continued to hedge geopolitical risks. Additionally, recent comments from Fed President Jerome Powell indicated that the Fed might be open to cut rates if data weakens. This drove the probability of a rate cut up and helped fuel the rally in gold. Since gold is a safe-haven asset class, it tends to perform best when interest rates are low and volatility is high. Going into the remainder of 2019, gold has the potential to rise if current tensions persist and interest rates drop.

Bonds

The 10-year Treasury yield remained unchanged at 2.09% resulting in slightly positive performance for traditional US bond asset classes. During the week, treasuries experienced little activity as fixed income investors await the Fed decision this week. While no rate cut is expected following the meeting, investors are pricing in an 80% probability of rate cut in July and 70% probability of a rate cut in September. This is up significantly from what was 0% at the beginning of the year. Supporting sentiment for a rate cut was the recent lackluster jobs report and a slight gain in unemployment claims. However, holistically the US continues to look relatively healthy, showing no major signs of a slowdown.

High-yield bonds were positive for the week as riskier asset classes rose and credit spreads tightened. As long as US economic fundamentals remain healthy, higher-yielding bonds have the potential to experience further gains in the long-run as the risk of default is still moderately low.

 

Asset class indices are positive so far in 2019, with large-cap US stocks leading the way and commodities lagging behind.

 

Lesson to be Learned

The market will not go up unless it goes up, nor will it go down unless it goes down, and it will stay the same unless it does either”

– George Goodman

Short-term market swings can, and will, frustrate even the most experienced investors. Nobody knows which ways markets are going to move in any given day or week. This is why it is important to ignore short-term market noise and focus on the longer-term trends. If you stick with a plan and maintain a properly diversified portfolio, you increase your chances for portfolio growth over the long-run.

 

FormulaFolios Indicators

FormulaFolios has two simple indicators we share that help you see how the economy is doing (we call this the Recession Probability Index, or RPI), as well as if the US Stock Market is strong (bull) or weak (bear).

In a nutshell, we want the RPI to be low on the scale of 1 to 100.  For the US Equity Bull/Bear indicator, we want it to read least 66.67% bullish. When those two things occur, our research shows market performance is strongest and least volatile.

The Recession Probability Index (RPI) has a current reading of 26.39, forecasting further economic growth and not warning of a recession at this time. The Bull/Bear indicator is currently 33.33% bullish – 66.67% bearish, meaning the indicator shows there is a slightly higher than average likelihood of stock market decreases in the near term (within the next 18 months).

 

The Week Ahead

The Federal Reserve will conclude its regularly scheduled meeting on Wednesday. Though an immediate change in rates is not expected, investors will be looking for hints regarding the potential for changes later in 2019.

 

More to come soon.  Stay tuned.

Regards,

Derek Prusa, CFA, CFP®
Senior Market Analyst