Week in Review

US stocks experienced the worst Thanksgiving week of performance since 2011.

In the holiday-shortened week, US stocks slumped as the S&P 500 and Dow Jones Industrial Average turned negative for the year. Popular tech giants lead markets to a second consecutive week of sharp losses as stocks retested the low levels from late October. FAANG companies – Facebook, Amazon, Apple, Netflix, and Google – fell between 3.5% and 11% for the week as investors continued to worry about future growth potential. While these widely-followed stocks had been soaring higher earlier in the year, each is now officially in a bear market (down more than 20% from recent high levels).

Energy stocks were also weak as oil prices continued to tumble. On Friday, crude oil prices fell almost 7%, capping the worst week since early 2016. Anxiety about oversupply and diminishing demand has caused oil prices to fall 33% since mid-October as inventories have now increased for nine consecutive weeks.

While 2018 has been volatile and somewhat negative, investors are hoping for a holiday-fueled rally to end the year. Short-term “newsworthy” events have been intensifying market noise recently, making it difficult to focus on the fundamental drivers behind markets. However, as long as the economy remains healthy and earnings continue to grow, there is the potential for a bounce off current lows (though many expect volatility to persist in the foreseeable future). While short-term trends and market noise can make it tempting to make knee-jerk decisions, 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

One of the biggest focal points of 2018 has been the 10-year US Treasury Yield. Concerns about the 10-year yield moving higher and whether the yield curve will invert (when shorter-term bond yields become higher than the longer-term bond yields) have been driving market activity. Since breaching the 3% level in September for the second time this year, the 10-year yield has been able to stay above the key resistance level. However, the latest market rout has caused investors to flock toward safe-haven asset classes, driving the yield back toward this key level. Market technicians seem to believe if the 10-year was to break below the 3% support, resistance could form, and yields could be driven down even further. This week, market watchers are awaiting the Federal Reserve speeches and a one-on-one meeting between President Donald Trump and Xi Jinping of China to help clarify geopolitical risks and better gauge the direction of rates.

*Chart source: Bloomberg


Market Update


Broad equity markets finished the week negative as large-cap US stocks experienced the largest losses. S&P 500 sectors were negative, with defensive sectors outperforming cyclical sectors.

So far in 2018 healthcare, utilities, and consumer discretionary are the strongest performers while materials and communication services have been the worst performing sectors.


Commodities were negative as oil prices dropped 10.70%. This is the seventh consecutive weekly loss for oil as the commodity plunges further into bear market territory. Investors had previously thought an oil shortage was set to occur as sanctions against Iran came into effect. However, as events unfolded, the United States granted 6-month waivers to allow eight countries to temporarily import oil from Iran. Additionally, the United States remains on course with higher production levels despite the recent plunge in prices. However, current suppressed prices have investors questioning the viability of smaller producers. The upcoming weeks should provide more clarity as OPEC countries are set to meet on December 6th to decide on output levels.  In the meantime, some market analysts believe that the recent drop in oil might be pushing the commodity close to its bottom.

Gold prices rose by 0.01%, closing the week at $1,229.10/oz. The metal held steady as the dollar rose and risk tapered in Europe. Gold, often safe-haven asset class, typically performs better in low and steady US interest rate environments as foreign investors don’t have to pay a premium for the metal. As the dollar strengthens, the price of the gold goes up, making it less attractive for foreign investors. However, volatility remains prevalent in US markets as domestic and geopolitical risks remain, making the metal more attractive to hedge risk in the near-term.


The 10-year Treasury yield fell from 3.08% to 3.05%, resulting in mostly flat performance for traditional US bond asset classes. The fall in stock markets lead investors looking for safety in treasuries, leading to lower yields. Additionally, as risks mount, some investors believe that the Fed might change course (or at least soften their stance on the path of rate hikes). In the upcoming weeks, investors will be watching geopolitical and market events in order to gauge the need for safe haven treasuries.

High-yield bonds were negative for the week as riskier asset classes performed poorly and credit spreads loosened. However, as long as economic fundamentals remain healthy, higher-yielding bonds are expected to continue outperforming traditional bonds in the long-run as the risk of default is moderately low.


Asset class indices are negative in 2018, with large-cap US stocks leading the way and international stocks lagging behind.


Lesson to be learned

A lot of people with high IQs are terrible investors because they’ve got terrible temperaments. You need to keep raw, irrational emotion under control.”

– Charlie Munger

While intelligence is important for creating an investment strategy, many investors struggle with keeping emotions intact. It can be easy to get caught-up in short-term market movements, letting emotions drive the decision-making process and deviating from the plan. However, this is often when investors make the worst financial decisions, causing the most harm to their portfolios. By staying disciplined and sticking to an emotion-free investment strategy, you can avoid irrational missteps and increase the odds of success in the long-term.


FFI 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 24.63, forecasting further economic growth and not warning of a recession at this time. The Bull/Bear indicator is currently 33.33% bullish – 33.33% neutral – 33.33% bearish. This means there is no clear direction of stock market movements for the near term (within the next 18 months).


The Week Ahead

US President Donald Trump and Chinese President Xi Jinping are set to meet following the G20 summit. Investors hope the meeting will help make headway in the ongoing trade war between the US and China.


More to come soon.  Stay tuned.


Derek Prusa, CFA, CFP®
Senior Market Analyst