Markets proceeded cautiously this week, with major equity indices either returning gains or slight losses. Technology took the lead, finishing ahead of communications and healthcare to round out the strongest sectors. Geopolitical tensions dominated the stage this week, as markets nervously awaited developments between the U.S. and Iran. Markets recovered as the risks of further escalation fell.
European indices returns skewed positive, with positive performing indices outweighing the negative ones. Globally, all equities received support from cooling geopolitical tensions. Japanese equities returned positive performance as well, recovering from mid week lows to return a respectable weekly return.
Markets performed reasonably well considering the geopolitical tensions, with most major indices bringing in positive returns. Though markets still returned positive performance, the recent volatility serves as a great reminder of why it is so important to remain committed to a long-term plan and maintain a well-diversified portfolio. When stocks were struggling to gain traction last month, other asset classes such as gold, REITs, and US Treasury bonds proved to be more stable. 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 can lead to smoother returns and a better probability for long-term success.
Chart of the Week
Oil is sinking in response to decreasing tensions in the middle east. Oil briefly spiked in previous weeks as markets feared escalation of conflict between the U.S. and Iran. Most recently, tensions have receded, leading to a fall in oil futures.
Broad equity markets finished the week mostly positive, with major large cap indices outperforming small cap. As 2020 gets into full swing, investors hope to build on remarkable 2019 returns.
S&P sectors were mostly positive this week. Technology and communications led the positive sectors returning 2.17% and 1.98% respectively. Energy and materials declined the most, returning -1.07% and -0.26% respectively. Technology has the lead so far YTD, returning 2.83% so far in 2020.
Commodities declined this week, driven by losses in oil. Oil markets have been highly volatile, with investors focusing on geopolitical tension and global demand concerns. The recent tensions between the U.S. and Iran have receded significantly, leading to fewer fears that an escalation could lead to supply disruptions.
Gold climbed slightly, finishing over the $1500/oz mark for the third consecutive week. Global growth concerns and geopolitical tension seem to be the driving factors behind gold’s ascent.
The 10-year Treasury yields rose from 1.79% to 1.82% while traditional bond indices fell. Treasury yields rose as geopolitical tensions declined, encouraging investors back towards risky assets. The 10-2 year yield spreads loosened. Treasury yields will continue to be a focus as analysts watch for signs of changing market conditions.
High-yield bond yields rose slightly over the week, reversing course from recent trends. High yield bond yields did not rise as much as treasury yields however, causing spreads to tighten. High-yield bonds are likely to remain volatile in the short to intermediate term as the Fed has taken a neutral monetary stance and investors weigh risk factors, likely driving increased volatility.
Lesson To Be Learned
Know what you own, and know why you own it.”
It can be easy to become distracted from our long-term goals and chase returns when markets are volatile and uncertain. It is because of the allure of these distractions that having a plan and remaining disciplined is mission critical for long term success. Focusing on the long-run can help minimize the negative impact emotions can have on your portfolio and increase your chances for success over time.
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 24.04, forecasting further economic growth and not warning of a recession at this time. The Bull/Bear indicator is currently 100% bullish – 0% bearish, meaning the indicator shows there is a slightly higher than average likelihood of stock market increases in the near term (within the next 18 months).
The Week Ahead
It will likely be an interesting week as U.S. markets will be digesting both CPI and retail sales numbers for the month of December. Price and retail data from the month of December are critical for markets, as holiday season data is commonly used as a barometer for the health of the U.S. economy.
More to come soon. Stay tuned.