Week in Review

Stocks continued to rally as economic data and trade talk progress boosts investor sentiment.

After the S&P 500 posted its strongest first quarter since 1998, stocks continued to rally during the first week of Q2. Helping boost markets was a stronger than expected jobs report. Payrolls increased by 196,000, beating the expected gain of 180,000 and extending the record streak of job creation to 102 consecutive months. The unemployment rate remained at 3.8%, near its 50-year low. This positive data was reassuring for investors fearing the US economy is on less stable ground.

Optimism regarding a trade deal between the US and China also helped boost sentiment during the week. High-level officials from both sides recently met in Washington DC for another round of negotiations. Following the conclusion of the meetings on Thursday, President Trump stated the two countries were close to reaching an agreement. While it is still too soon to set a date for a signing summit, Trump said a proposal could be drafted within the next four weeks, followed by a few weeks of refining. Chinese President Xi Jinping also sounded upbeat as he conveyed both sides have made substantial progress on key issues in recent meetings.

Stocks have rallied significantly since the late December lows, with the S&P 500 gaining over 23% since Christmas – bringing it within 2% of a new all-time-high. Following such a strong rally to start the year, the potential for continued gains seems to be hinging on a US-China trade deal. Trade tensions have been a constant source of volatility for over a year, but optimistic reports have boosted investor sentiment in recent months. However, there are also still reasons to remain cautious, such as softening global growth, Brexit uncertainty, and yield curve fears. With conflicting signals and data, it is reasonable to expect volatility to persist as markets remain sensitive to major headlines. This market noise can make it tempting to make knee-jerk decisions, but as investors we need to stay committed to our long-term financial goals and risk tolerance. Staying focused on our long-term investment objectives and maintaining a disciplined investment strategy can help reduce market noise and increase the odds of a successful outcome over time.

 

Chart of the Week

The S&P 500 closed the week up over 2%, bringing the Index just 1.3% away from reaching a new all-time-high. A now perceived dovish Fed alongside President Trump’s comments urging officials to cut rates has helped propel the Index forward in recent weeks. Currently, the S&P is in its longest winning streak (measured by daily gains) since October 2017. This comes as investors are becoming increasingly bullish on equities in the midst of positive news. In the upcoming weeks, investors will be monitoring geopolitical risks and US company earnings to better gauge the direction of the stock market.

*Chart source: Bloomberg

 

Market Update

Equities

Broad equity markets finished the week positive as small-cap stocks outperformed large-cap stocks. S&P 500 sectors were mostly positive, with cyclical sectors outperforming defensive sectors.

So far in 2019, technology and industrial stocks are the strongest performers while healthcare has been the worst performing sector.

Commodities

Commodities were positive as oil prices increased by 4.89% to $63.08/bl. This marks the fifth consecutive weekly increase for the commodity since falling to the $55/bl level over a month ago and the second time since breaching the $60 level this year. Oil continued to climb as market supply levels tightened due to ongoing sanctions on Iran and Venezuela. Additionally, tensions in Libya have begun to re-escalate and have the potential to affect oil supply and price levels. Year-to-date, oil prices are up over 40%.

Gold prices decreased by 0.20%, closing the week at $1,290.40/oz. This is the metals second decline in five sessions since falling below the $1,300/oz level. Since gold is a US dollar-denominated safe-haven asset class, it tends to perform best when interest rates are low, volatility is high, and supply and demand forces are stable. Currently, markets are recovering from the four rate hikes in 2018 and have turned more bullish on US equities. However, if ongoing geopolitical tensions were to persist and economic data were to deteriorate, the demand for gold as a safe haven asset could increase.

Bonds

The 10-year Treasury yield increased from 2.41% to 2.50%, resulting in negative performance for traditional US bond asset classes. Treasury yields remained relatively low despite a strong jobs report driving investors into equity markets. A recent string of global events has caused an excess flow of money into US safe haven treasuries, consequently pushing yields lower so far in 2019.

High-yield bonds were positive for the week as riskier asset classes rose and credit spreads tightened. 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 small-cap US stocks leading the way and traditional US bonds lagging behind.

 

Lesson to be Learned

You can find good reasons to scuttle your equities in every morning paper and on every broadcast of the nightly news”

– Peter Lynch

With the fast pace of technology growth and news delivery, it is easy to find reasons to “tinker” with your investments every day. However, reacting to “hot headlines” can be detrimental to your portfolio. To be a successful investor, it is imperative to be resilient and patient, removing emotions from the equation and sticking to the plan you have laid out. By sticking to an emotion-free, disciplined investment strategy, you can avoid chasing returns and increase the odds of success 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 30.10, forecasting further economic growth and not warning of a recession at this time. The Bull/Bear indicator is currently 66.67% bullish – 33.33% 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

Major US indices are within 2% of reaching new all-time-high levels. Investors will be watching to see if new highs can be reached, or if more volatility is ahead. The start of earnings season this week may provide insight into the near-term direction of the markets.

 

More to come soon.  Stay tuned.

Regards,

Derek Prusa, CFA, CFP®
Senior Market Analyst