Stocks finished slightly negative after a wild week of trading. Trade tensions escalated on Monday as China’s currency fell to its lowest level against the dollar in over 10 years. The US Treasury Department responded by labeling China as a currency manipulator. As investors grew concerned recent trade tensions could evolve into a currency war, equity markets experienced their worst day of 2019 as major indices fell around 3% to kick off the week.
However, on Tuesday Chinese officials announced they did not plan to devalue the currency as the slide stopped, helping reassure investors. By Thursday, most stock indices had clawed back into positive territory for the week as no further negative news emerged. This was short lived though as President Trump expressed skepticism of a trade deal being reached in the near-term on Friday, sending markets lower to close the week. It was a volatile week for stocks as the S&P 500 experienced three days with gains or losses of over 1% (compared to just three such days over the previous two months combined).
While stocks trended lower, other asset classes continued to perform well. Gold finished the week with a 3.5% gain, REITs were up over 1.7%, and 20+ year US Treasury bonds rose 2.6%. This is why it is important to remain committed to a plan and maintain a well-diversified portfolio.
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
After starting the week on a negative note, the S&P 500 rallied to erase almost all its losses. Fueling the rally was a consensus amongst bullish investors that the recent sell-off was overdramatized and that markets still have room to run. Additionally, after President Trump labeled China as a currency manipulator, the Chinese government quickly reinforced the daily fixing of its currency and even pegged the currency at a higher than expected rate to the dollar. This helped ease fears and concerns that the trade conflict is worsening.
*Chart source: Bloomberg
Broad equity markets finished the week negative as domestic stocks fared better than international stocks. S&P 500 sectors were mostly negative, with defensive sectors outperforming cyclical sectors.
So far in 2019, technology and real estate stocks are the strongest performers while energy has been the worst-performing sector.
Commodities were negative for the week as oil prices decreased by 2.08% to $54.50/bl. Prices fell as trade tensions between the US and China escalated when China let its currency fall below a pegged range. Additionally, the International Energy Agency (IEA) cut its forecast for oil demand growth for this year and next. The IEA quoted fears of an economic downtown as trade tensions between the US and China remain relevant. Furthermore, global economies are experiencing deteriorating economic indicators as GDP and manufacturing gauges fall, further reinforcing the IEA’s logic. Year-to-date, oil prices are up 20%, but are still 26% lower than the highs experienced in April.
Gold prices rose by 3.50%, closing the week at $1,508.50/oz. This is the largest weekly increase since mid-June and the first time gold has officially closed a week over $1,500/oz since March of 2014. During the week, investors rushed into the metal as trade tensions drove a sell-off in equities. Additionally, as interest rates continue to fall, and global economic growth seems to be slowing down, investors are ramping up purchases of gold as a hedge against uncertainties. Since gold is a safe haven asset class, it tends to perform best when interest rates are low and volatility is high. Currently, gold prices sit at a 6-year high as the economic environment has helped foster additional price increases.
The 10-year Treasury yield fell from 1.86% to 1.74%, resulting in positive performance for traditional US bond asset classes. Yields hit the lowest level since October 2016 as trade fears rippled through markets. Additionally, as the 10-year yield fell, the 2-year yield fell to 1.63%. This puts the spread between the 10 and 2-year treasury at 11 basis points. Historically, if the spread falls to 0 bps or goes negative, a recession is expected to follow in 6-24 months.
High-yield bonds were negative for the week as riskier asset classes fell and credit spreads loosened. However, 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.
Lesson to be Learned
Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard.”
– Warren Buffett
Too often, investors get caught up in the daily values of their portfolios. During periods of heightened volatility, it can be especially tempting to make knee-jerk decisions in reaction to recent market movements. However, if you are too focused on short-term results it can come at the detriment of long-term gains. This is why it is important to implement a plan with predefined steps to take ahead of time. If you stick with a plan and maintain a properly diversified portfolio, you increase your chances for a successful investment outcome in the long-run.
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 28.76, 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
As earnings season winds down, investors will be watching to see how markets react to the recent increases in volatility and geopolitical uncertainty.
More to come soon. Stay tuned.