U.S. equity markets were mixed for the week, with markets finishing largely unchanged from the prior week. The energy sector led the pack, finishing ahead of consumer staples and healthcare at the top of the positive sectors. This week saw markets hesitate after some conflicting U.S. jobs data. Before the major non-farm payrolls release on Friday, employment in the U.S. appeared to be weakening. A surprise expectations beat Friday changed perceptions and lifted stocks. Additionally, the rhetoric surrounding the U.S. – China trade war was largely positive, with both sides expressing that reaching a deal is the preferred outcome and that a deal is close to being agreed upon.

European indices largely declined over the week on negative economic data from several countries. Retail sales from the entire Eurozone disappointed, missing expectations, indicating a weakening economic situation. Additionally, Germany reported a significant drop in industrial production. Improvement in the trade dispute between the U.S. and China and an excellent U.S. jobs report was not enough to lift European equities. Japan faired better, with the Nikkei index finishing the week up modestly. Positive U.S. data and trade conditions were able to help lift Japanese equities.

Major indices hesitated this week and returns were mixed. Year to date, markets are still up substantially. While this is good news, the volatility in recent weeks and months still serves as a great reminder of why it is so important to remain committed to a long-term plan and maintain a well-diversified portfolio. When stocks were struggling to gain traction last month, other asset classes such as gold, REITs, and US Treasury bonds proved 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

U.S. jobs data smashed expectations this week, exceeding analyst predictions by nearly 100K. This pushed unemployment down to 50 year lows, encouraging investors that the state of the U.S. economy is still favorable.

 

Market Update

Equities

Broad equity markets finished the week mixed, hovering near all time highs, as investors weighed multiple macroeconomic factors.

S&P sectors were mixed but skewed slightly positive, with industrials and consumer discretionary bottoming out at -1.09% and -0.79% retuns respectively. Energy and consumer staples led the positive sectors with 1.52% and 0.92% returns respectively. Technology continues to lead the S&P sectors YTD with 41.21% growth.

Commodities

Commodities climbed this week, driven by significant gains in oil. Oil markets have been highly volatile recently, with investors focusing on geopolitical tension and global demand concerns. Saudi Arabia threatened OPEC with retaliatory oil output increases if fellow members don’t reduce their oil market contributions to agreed upon levels, spurring further reduction from the oil cartel. Additionally, recent EIA oil inventory numbers beat expectations with a significant decline in oil inventory, reversing recent trends of repeated expectations misses. If U.S. – China trade optimism continues, this will likely add upward pressure on oil prices, but recently short term fears have mostly outweighed longer term likely trade prospects.

Gold prices declined slightly this week, falling -0.52% due to optimism surrounding the progress in U.S. – China negotiations and a strong U.S. labor market. The market is continuing to wrestle with macroeconomic factors to determine appropriate value. The U.S. – China trade deal will likely be the determining factor in longer term gold prices.

Bonds

The 10-year Treasury yields rose from 1.78% to 1.84% while traditional bond indices fell. Treasury prices rose on subsiding fears concerning global macroeconomic outlook, spurred by U.S. – China progress and U.S. labor market strength. The 10-2 year yield spreads widened for the second consecutive week, indicating improving economic conditions. Treasury yields will continue to be a focus as analysts watch for signs of changing market conditions.

High-yield bonds rose over the week, indicating continued efforts by investors to reduce positions in the riskiest bonds, driving spreads to loosen. High-yield bond yields are likely to remain elevated in the long term as the Fed taken a neutral monetary stance and investors pursue lower risk assets, likely driving yields higher over time.

 

Lesson to be Learned

The individual investor should act consistently as an investor and not as a speculator. This means … that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money’s worth for his purchase.”

– Ben Graham

It can be easy to become distracted from our long-term goals and chase returns when markets are volatile and uncertain. It is because of the allure of these distractions that having a plan and remaining disciplined is mission critical for long term success. Focusing on the long-run can help minimize the negative impact emotions can have on your portfolio and increase your chances for success over time.

 

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 26.26, 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

It will be a busy week including a Fed meeting announcement, a tariff deadline, and a general election in the UK. Geopolitics will likely drive markets during the week.

 

More to come soon.  Stay tuned.