Global markets ended the week on a positive note thanks to renewed trade progress optimism. Just before US markets closed on Friday, it was announced US and Chinese negotiators had reached a partial trade deal. In “phase one” of the deal, the US will suspend upcoming tariff increases originally set for October 15 in return for increased agricultural purchases from China. The partial deal will also address intellectual property, financial services, and currency concerns.
President Trump said it will take three to five weeks to draw up the entire first stage of the deal and provide a catalyst for the next phase. The trade dispute between the US and China has been going on since mid-2018, with 13 rounds of talks between the two countries so far. During this time, markets have experienced heightened levels of volatility as trade uncertainties dampened investor sentiment. However, the most recent negotiation seemed to finally result in substantial progress toward reaching a longer-term agreement.
The positive news helped stocks snap a three-week losing streak as the S&P 500 was able to overcome downward pressure from earlier in the week. While it was a positive week, recent volatility serves as a reminder of why it is important to remain committed to a long-term plan and maintain a well-diversified portfolio. Including a mixture of other asset classes such as gold, REITs, and US Treasury bonds would have resulted in more stability than an all-stock 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
The inverse correlation between gold and the U.S. dollar has weakened to the lowest level in almost three years. The dollar and gold prices typically move in opposite directions; as the dollar weakens gold becomes cheaper to other currencies, driving up gold prices. Unexpected optimism surrounding U.S. and China drove down both the dollar and gold, weakening the relationship between the two assets.
*Chart source: Bloomberg
Broad equity markets finished the week positive as geopolitical tensions decreased.
S&P sectors were mixed but skewed positive, with utilities and consumer staples bottoming out -1.41% and -0.86% respectively. Materials and industrials led the positive sectors with 1.85% and 1.54% respectively. Technology continues to lead the S&P sectors YTD with 31.59% growth.
Commodities climbed this week as oil improved 3.58%. Oil markets have been highly volatile recently, driven largely by tensions and conflict in the Middle East. Tensions flared this week as an unclaimed attack struck an Iranian ship passing through the Red Sea. Additionally, U.S. – China trade optimism will likely add upward pressure on oil prices.
Gold prices decreased by 1.60% this week. Recent geopolitical optimism has depressed gold prices, outweighing concerns surrounding global economic growth concerns. The U.S. – China trade deal will likely be the determining factor in gold prices.
The 10-year Treasury yield jumped from 1.53% to 1.73% while traditional bond indices fell. Treasury yields have climbed under optimism surrounding geopolitical risks and economic growth. The 10-2 year yield curve continued a normal, non-inverted relationship, and for the first time since July even the 10 year – 3 month yield curve (the Fed preferred yield curve) returned to a normal relationship. Treasury yields will continue to be a focus as analysts watch for signs of a recession.
High-yield bonds increased slightly over the week, defying traditional bonds and treasury movements as credit spreads tightened. High-yield bonds are likely to remain attractive in the long term as the Fed has adopted a dovish stance and is expected to continue to lower rates, 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 traditional bonds lagging.
Lesson to be Learned
The stock market is a device to transfer money from the impatient to the patient”
– Warren Buffett
It can be easy to become distracted from our long-term goals and chase returns when markets are volatile and uncertain. However, patience is imperative for having success when investing. This is why it is so important to build a plan and stick to a disciplined investment strategy. 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 26.94, 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
Q3 earnings season is set to kick off as major banks will begin reporting results this week. Investors will also continue monitoring trade negotiations and the possibility for another Fed rate cut.
More to come soon. Stay tuned.