Week in Review
US equity markets were positive during the short holiday week as the labor market remains robust. Well into the bull market’s ninth year, employers added 213,000 jobs – beating economists’ expectations of 195,000. Wage growth also continued its positive streak with 93 consecutive months of gains (the last negative month was September 2010). The unemployment rate ticked up from 3.8% to 4.0%, but for a positive reason: more potential workers entered the job market from the sidelines.
As the labor market continues to thrive, investors are gearing up for Q2 earnings season. Currently, the estimated earnings growth rate for the S&P 500 Index is 20.0%. If the Index can at least match this expectation, it would be the second consecutive quarter of earnings growth of 20% or above (the Index reported a blended earnings growth of 24.8% in Q1). Analysts have been mostly optimistic going into this earnings season, upwardly revising expectations by 0.8% – the second-largest increase since 2010.
Despite the positive economic and fundamental data, tariff tensions have continued to cap gains. Many investors expect persistent heightened level of volatility in the near-term as trade talks dominate headlines. The day-to-day noise can tempt even the most-intelligent investors to make knee-jerk decisions. However, as investors we need to stay committed to our long-term financial goals. Staying focused on our long-term investment objectives and maintaining a disciplined investment strategy can help reduce market noise and increase the odds of a successful outcome over time.
Chart of the week
The S&P Index was positive for the week and remains within the broad range of the upward trend that began in mid-February 2016. Shorter-term momentum has been somewhat negative and volatile, but support has held at the bottom of the trading range, helping push the Index off the low levels experienced in mid-February 2018. The coming weeks should continue to provide valuable insight about the near-term direction of the Index, but it seems to remain in a long-term bullish pattern for now despite the recent weakness.
*Chart created at StockCharts.com
Broad equity markets finished the week positive as small-cap US stocks saw the largest gains. S&P 500 sectors were mostly positive; defensive stocks broadly outperformed cyclical stocks.
So far in 2018, technology, consumer discretionary and energy have been the strongest performers, and telecommunications, consumer staples and industrials have struggled.
Commodities were negative as oil prices fell 0.47%. While oil prices rallied, gaining almost 14% over the previous two weeks, prices slipped after data showed an unexpected increase in inventories on Thursday. Since the OPEC-led output cuts in January 2017, global inventories have been trending lower, supporting a positive long-term trend in oil prices.
Gold prices eked out a 0.24% gain as the dollar softened. A generally stronger dollar has resulted in downward pressure on gold in recent months. However, the metal has been somewhat supported by geopolitical concerns, helping provide relief from further downside risk.
The 10-year Treasury yield fell from 2.85% to 2.82%, resulting in positive performance for traditional US bond asset classes. Despite the Federal Reserve (Fed) rate hike in June, longer-term yields have remained suppressed as trade-war fears have caused investors to seek safe-haven asset classes.
High-yield bonds were positive for the week as riskier asset classes experienced upward pressure. As long as the economy remains healthy, higher-yielding bonds are expected 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, with small-cap US stocks leading the way and traditional bond categories lagging behind.
Lesson to be learned
The individual investor should act consistently as an investor and not as a speculator.”
– Benjamin Graham.
While it can be tempting to speculate – to put all of your money in the next Amazon or Apple – nobody can predict the future. If you guess correctly it can payoff greatly, but if you guess incorrectly it can be detrimental. This is why it is important to base your decisions on facts and analysis, rather than risky speculative predictions. By sticking to an emotion-free, disciplined investment strategy, you can increase the odds of success in the long-term without taking unnecessary risks.
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 24.00, forecasting further economic growth and no warning of a recession at this time. The Bull/Bear indicator is currently 66.67% bullish – 33.33% neutral – 0.00% bearish. This means the indicator believes there is a slightly higher than average likelihood of stock market increases in the near term (within the next 18 months).
The Week Ahead
Several major banks, including Wells Fargo, JPMorgan Chase and Citibank, will unofficially kick off Q2 earnings season on Friday. Investors are hoping a strong earnings season will boost broad stock markets to new highs after a volatile first half of the year.
More to come soon. Stay tuned.
Derek Prusa, CFA, CFP®
Senior Market Analyst