Week in Review
Global stock markets ended the week on a negative note as geopolitical concerns surrounding Turkey rattled investors.
On Thursday morning, the Turkish delegation returned from the US with no progress on the detention of American pastor Andrew Brunson. The US has been at odds with the country since 2016, when Turkish authorities arrested Brunson after he was charged with supporting a group plotting to overthrow the Turkish government. In July, President Trump said the US would place “large sanctions” on the country if Brunson was not released, as his trial is set to resume in October. The Turkish lira fell to a record low following the news, sending a small shockwave of uneasiness across global markets.
Negative sentiment accelerated on Friday as Turkish President Recep Tayyip Erdogan asked citizens to convert their US dollars and other foreign currencies (as well as gold holdings) to Turkish lira to support the country. Following this statement, President Trump authorized a doubling of tariffs on Turkish steel and aluminum imports amid the growing diplomatic dispute between the two countries. This caused the lira to fall as much as 20% versus the dollar, sending investors running toward safe-haven asset classes, such as US Treasury bonds.
This is just the latest event in a year that has been plagued by geopolitical uncertainties. Despite the heightened downside risk and volatility at week-end, many analysts believe the downturn is a short-term, instinctive reaction by the markets, and the prospects for the remainder of 2018 are still somewhat positive for global stocks.
Strong earnings and economic data reports have continued to offset geopolitical risks in recent weeks. However, it is still important to remember to include a broad range of asset classes in your portfolio for more-consistent and more-stable longer-term results, rather than chasing short-term returns. While day-to-day noise can tempt investors into making knee-jerk decisions, we need to stay committed to our long-term financial goals. 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 Turkish lira slid by more than 13% against the US dollar when all was said and done on Friday, adding to the currency’s losses since the beginning of the year. Turkey has had economic difficulties throughout 2018, as currency weakness has fueled double-digit inflation, making it more expensive for the country to repay the large amount of debt it has accrued from other governments. The currency has fallen more than 40% against the dollar this year, igniting worries about a full-blown economic crisis.
*Chart from Bloomberg
Broad equity markets finished the week mixed; US small-cap stocks experienced gains and international stocks suffered the largest losses. S&P 500 Index sectors were mixed, with cyclical sectors broadly outperforming defensive sectors.
So far this year, technology, consumer discretionary and healthcare have been the strongest performers, while telecommunications, consumer staples and materials have been the worst performers.
Commodities were negative as oil prices fell by 1.26%, marking the sixth straight week of declines as troubled emerging-market economies (specifically Turkey) curbed the outlook for fuel demand. While oil prices had been trending higher since the OPEC-led output cuts in January 2017, concerns about rising production and falling demand has caused some investors to worry about oversupply in the near term.
Gold prices slipped by 0.26%—their fifth consecutive weekly decline. A generally stronger dollar has resulted in downward pressure for gold in recent months, as it has made the metal more expensive for foreign investors.
The 10-year Treasury yield fell sharply from 2.95% to 2.87%, resulting in positive performance for traditional US bond asset classes. Yields dropped at the end of the week as tensions surrounding Turkey escalated.
High-yield bonds were slightly negative for the week as most riskier asset classes experienced losses. However, as long as the economy remains healthy, we expect higher-yielding bonds to continue outperforming traditional bonds as the risk of default is moderately low.
Asset-class indices are mixed so far in 2018, with US small-cap stocks leading and traditional bond categories lagging.
Lesson to be learned
The emotional burden of trading is substantial; on any given day, I could lose millions of dollars. If you personalize these losses, you can’t trade.”
– Bruce Kovner
Investing can trigger many emotions – even for the most seasoned professionals. However, if you want to be a successful investor, you have to disconnect your feelings from what’s happening in the market. By sticking to an emotion-free, disciplined investment strategy, you can increase the odds of success in the long-term.
FormulaFolios has two simple indicators that can help you measure the health of the economy. The first indicator is the Recession Probability Index, or RPI, and the second is the US Equity Bear/Bull Indicator, which tells us whether the US stock market is strong (bull) or weak (bear).
The RPI reading should ideally be on the lower end on a scale of 1 to 100., while the US Equity Bull/Bear Indicator reading should ideally be at least 67% bullish. When these two readings are at their ideal levels, our research shows that market conditions are at their strongest and least volatile.
The RPI currently registers 22.97, forecasting further economic growth with no warning of recession risk at this time. The US Equity Bull/Bear indicator is currently 100% bullish, 0% bearish and 0% neutral. This means the indicator believes there is a slightly higher-than-average likelihood of stock-market gains in the near term (within the next 18 months).
The Week Ahead
Earnings season continues to wind down, and investors will likely remain focused on the rising currency crisis in Turkey.
More to come soon. Stay tuned.
Derek Prusa, CFA, CFP®
Senior Market Analyst