Stocks finished the holiday-shortened week higher on continued trade optimism. The largest gains came on Wednesday and Thursday following news that US and Chinese officials confirmed plans to meet in early October. This was a relief to many as recent tariff announcements signaled talks might be canceled indefinitely. While consumers have supported a growing economy, business sentiment has continued to fall as trade uncertainties linger. Progress toward a trade resolution could increase business confidence and help the economy remain on track.

As investors continued to focus on geopolitics, the jobs report on Friday left markets little changed. The US economy added 130,000 jobs in August, slightly below the expected gain of 158,500. Despite missing expectations, it was the 107th consecutive month of job gains, illustrating the continued resilience in the economy. The unemployment rate was unchanged at 3.7%, remaining near multi-decade lows, as more people entered the workforce.

While stocks have strung together a couple of positive weeks, the heightened volatility from August 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. While stocks have been fluctuating recently, other asset classes such as gold, REITs, and US Treasury bonds have proven 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

All three major US indices improved last week after China and the US agreed to restart trade negotiations. In addition to trade optimism, hiring data has remained positive, and Fed Chairman Powell has reiterated that his current stance on monetary policy will continue to be dovish.

*Chart source: Bloomberg

 

Market Update

Equities

Broad equity markets finished the week mostly positive as trade tensions decreased.

S&P sectors were all positive, with consumer discretionary and energy sectors leading the pack with 2.61% and 2.64% respectively. Technology continues to lead the S&P sectors YTD with 31.1% growth.

Commodities

Commodities improved modestly this week as oil recovered 2.58%. Data has remained relatively consistent in oil markets, with most measurements showing bullish indicators such as decreasing oil inventories. Global economic growth concerns have been dragging on prices in recent weeks, but recent trade optimism has helped push prices higher. Should trade worries continue to subside, it’s likely that oil prices will continue to rally.

Gold Prices decreased by a modest -0.91% this week as global economic growth concerns reduced. This marks the second consecutive week of declining gold prices, closing the week at $1515.50/oz. Commonly used a hedge against economic uncertainty, gold is still up 15.47% on the year on growth concerns. Also pushing up gold prices is a more dovish Fed, as the US central bank has taken a more accommodating monetary stance.

Bonds

The 10-year Treasury yield rose from 1.49% to 1.56% resulting in a positive performance for traditional US bond asset classes. Yields have recovered slightly from multi year lows on improved trade conditions between the US and China. This week saw the 10-2 year yield curve return to a non-inverted relationship. This should help calm investor worries about an impending recession in the US, but investors will still be eyeing yields closely to monitor for changing circumstances.

High-yield bonds increased slightly over the week as perceived economic risks subsided somewhat and credit spreads tightened slightly. High-yield bonds are likely to remain attractive in the long term as the Fed has adopted a dovish stance, likely helping current bonds longer term prospects.

 

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

 

Lesson to be Learned

The most important quality for an investor is temperament, not intellect.”

– Warren Buffett

When markets are volatile, it can be easy to make knee-jerk emotional decisions. However, this is precisely when it is important to maintain an even-keeled temperament. As long-term investors we need to remain disciplined, ignore daily market noise, and maintain a well thought out plan. 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 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 29.82, 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

Inflation and consumer sentiment data will be released this week; both seen as important to the upcoming September Fed meeting.

 

More to come soon.  Stay tuned.