Stocks ended a volatile August on a high note, snapping a four week losing streak as trade optimism carried markets higher. The week started on a positive note as President Trump appeared to deescalate recent trade tensions stating he believed China wanted to make a deal and the prospects for a deal were the best they had been for a while. The possibility for a trade deal took another turn for the better on Thursday as Chinese spokespeople announced there were no plans to retaliate against the latest US tariff decision and that the two sides remained in “effective communication.”
With the positive trade news, major US indices soared to the best week since early June. Economic data also helped lock in weekly gains as a strong consumer spending report on Friday capped off a positive week. US consumer spending has been a bright spot amid a weakening global economy, and the most recent reported growth of 0.4% showed a continuation to this resilient trend. As the labor market remains stable and interest rates remain suppressed, near-term prospects for further spending are encouraging. This is important as increased spending has heavily supported GDP growth in recent quarters.
While it was a positive week, four of the 10 most volatile days so far in 2019 came in the past month, serving 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
The British pound fell below $1.20 for the first time since January 2017 as newly elected Prime Minister Boris Johnson threatened another election if opposers in his party move to block his Brexit efforts. This would be the third national poll in four years faced by the UK. However, Prime Minister Johnson appears confident that he would not lose the election if he receives support from his MP’s. Currently, the UK is set to leave the European Union by October 31st, regardless if an exit deal has been secured.
*Chart source: Bloomberg
Broad equity markets finished the week positive as large-cap stocks outperformed small-cap stocks.
S&P 500 sectors were positive, with cyclical sectors outperforming defensive sectors. So far in 2019, technology and real estate stocks are the strongest performers while energy has been the worst-performing sector.
Commodities were positive as oil prices increased by 1.72% to $55.10/bl. This was the largest weekly increase since the week of July 7th, 2019. Prices increased during the week on the back of positive US-China trade sentiment, but shaved off gains by week-end as Hurricane Dorian strengthened and moved closer to Florida. Additionally, the Organization of Petroleum Exporting Countries’ output rose to 80,000 barrels per day. This was the first monthly increase of the year and came as a surprise since OPEC members agreed to reduce supply by 1.2 million bpd in 2019.
Gold prices fell by 0.53%, closing the week at $1529.40/oz. This is the first weekly decrease since the week of July 21st, 2019. Gold pulled back slightly as equities rose and positive US-China trade sentiment rippled through the markets. However, although investors turned slightly optimistic, many are remaining cautious as global growth continues to deteriorate. Additionally, as some investors are pricing in further rate cuts in the United States, gold, as US dollar-denominated asset, could appear more attractive. On a month-to-date basis, gold increased by roughly 8%.
The 10-year Treasury yield fell from 1.52% to 1.50%, resulting in positive performance for traditional US bond asset classes. During the week, the 10-year to 2-year yield curve inverted for the third time. This happened as investors continued to hedge bets against equities by purchasing US treasuries. Currently, geopolitical risks have caused investors to rush into safe haven assets regardless of strong economic data from the US.
High-yield bonds were positive for the week as equities 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 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 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 28.76, 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
In the holiday-shortened week, the widely followed jobs report will be released on Friday. Investors will also be watching to see how markets react to ongoing trade tensions.
More to come soon. Stay tuned.