Week in Review
Stocks took a breather during the holiday-shortened week as markets remained near all-time-highs.
It was a relatively uneventful week as investors looked for hints regarding the near-term direction for markets. The S&P 500 traded within a 1% range throughout the week, never closing more than 0.23% higher or lower than the previous day. This consolidation comes as the Index is within 1% of closing at a new all-time-high level. Though it was a lite week for economic reports, retail sales surprised on the upside, bouncing back from a disappointing decline last month.
Overseas, concerns about China’s slowing economy eased somewhat as the country reported stronger than expected GDP growth. The Chinese economy grew 6.4% year-over-year in Q1, beating the 6.3% estimate. This was positive news as many feared the ongoing trade dispute between the US and China would create a more significant drag on the Chinese economy. Strong industrial production coupled with aggressive stimulus measures helped boost first quarter numbers.
While the past couple of weeks have been relatively quiet, US stocks have rallied significantly since the late December lows, with the S&P 500 gaining over 23% since Christmas. However, it is important not to chase these strong returns just because markets have been “hot.” It is reasonable to expect volatility to persist as markets remain sensitive to major headlines, hovering near new highs. 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 US labor market continued to flex its muscle in April as the latest jobless claims reading of 192,000 marked a fresh 49-year low. The decline of 5,000 claims was slightly below what analysts expected but also marks the fifth consecutive weekly decline. The stability seen in jobless claims over the last few months reaffirms investor confidence in the economy. In the upcoming weeks, investors will be watching other economic releases to better gauge the direction of the US economy.
*Chart source: FormulaFolios
Broad equity markets finished the week mixed as large-cap stocks outperformed small-cap stocks. S&P 500 sectors were also mixed, 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 were positive as oil prices increased by 0.17% to $64.00/bl. This marks the seventh consecutive weekly increase for the commodity since falling to the $55/bl level. It is possible crude oil holds over $60/bl as long as supply and demand levels remain relatively stable. Last week, prices rose on the back of Saudi exports falling by 277,000 barrels a day and lower US stockpiles. As sanctions on Iran and Venezuela persist, supply levels continue to tighten further applying additional upward price pressure. Year-to-date, oil prices are up over 40%.
Gold prices decreased by 1.45%, closing the week at $1,271.90/oz. Ever since falling below the $1,300/oz level in March, the metal has been unable to breach past highs. Since Gold is a US dollar-denominated asset class, it tends to perform best when interest rates are low, volatility is high, and supply and demand forces are stable. Recently, investors have been repositioning themselves towards defensive equities as the economy appears relatively healthy. Additionally, vital trade negotiations are progressing positively potentially paving the way for a risk-on environment in 2019.
The 10-year Treasury yield increased slightly from 2.56% to 2.57%, resulting in mostly flat performance for traditional US bond asset classes. During the week, positive economic data such as retail sales and jobless claims helped yields stabilize.
High-yield bonds were negative for the week as riskier asset classes were mixed and credit spreads loosened. However, 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 commodities 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 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
The first estimate of Q1 GDP will be released on Friday. Investors will also continue to closely monitor earnings as many companies report results this week.
More to come soon. Stay tuned.
Derek Prusa, CFA, CFP®
Senior Market Analyst