U.S. markets finished up for the week, leading to new all time highs in the S&P 500, Nasdaq, and Dow Jones indices for the third consecutive week. Consumer discretionary took the lead finishing ahead of technology and materials to round out the strongest sectors. Markets were somewhat calmed this week due to the shortened trading windows because of the holidays. Volumes should return to normal in 2020.

European indices finished mostly up for the week, following the U.S. markets to finish 2019. Due to the shortened trading week, most prominent indices did not deviate much from the previous week. While Japan does not observe Christmas a market holiday the same way as the West, the Nikkei still did not deviate much, and finished the week nearly flat.

Major indices mostly rose this week as markets quieted for the Christmas holiday. Markets are poised to have a banner year. While this is good news, the volatility in recent weeks and months still 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

U.S. employment markets are on a tear. As shown in the chart, the U.S. unemployment rate has not been this low since the 1960s. While the employment market doesn’t perfectly embody the U.S. economy as a whole, it is a good sign that Americans are working at the highest rates in fifty years.

 

Market Update

Equities

Broad equity markets finished the week mostly up, setting new all time highs. Investors head into 2020 riding a banner year, with the S&P500 nearing 32% annual returns.

S&P sectors were mostly positive this week as only utilities declined. Consumer discretionary and technology led the positive sectors returning 1.48% and 1.11% respectively. Utilities declined -0.44%. Technology continues to lead the S&P sectors YTD with 48.37% growth.

Commodities

Commodities rose this week, driven by gains in oil and gold but restrained by somewhat by natural gas. Oil markets have been highly volatile, with investors focusing on geopolitical tension and global demand concerns. Markets appear to be proceeding as if the “phase one” trade deal will be signed, turning more bullish on trade and production dependent commodities.

Somewhat surprisingly, gold climbed significantly, finishing over the $1500/oz mark for the first time in weeks. The U.S. – China trade deal will likely be the determining factor in longer term gold prices as a final signing of the agreement is awaited.

Bonds

The 10-year Treasury yields fell from 1.92% to 1.88% while traditional bond indices rose. Treasury yields fell despite market optimism surrounding the U.S. – China trade deal. The 10-2 year yield spreads widened. Treasury yields will continue to be a focus as analysts watch for signs of changing market conditions.

High-yield bond yields fell again over the week, indicating a possible thaw in investor attitudes towards riskier debt. High yield bond yields did not fall as much as treasury yields however, causing spreads to loosen. 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

Invest for the long haul. Don’t get too greedy and don’t get too scared.”

-Shelby M.C. Davis

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 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 26.26, 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 a slow week again as global markets wind down for the New Year. Trading volumes will likely decline leading to decreased volatility.

More to come soon. Stay tuned.