U.S. markets closed in positive territory for the fifth consecutive week, with all broad market equity indices experiencing gains. Financials shined as stocks in this group outperformed other sectors, with energy and materials coming in closely behind. Earnings season continues to be a boon and has seen a majority of equities beat expectations, helping push shares upward. The upward support pushed the Dow into new record territory, joining the Nasdaq and S&P 500 at new record highs. Upbeat sentiment surrounding the U.S. – China trade negotiations also fueled shares, as it has been widely reported that a “Phase One” deal is set to be signed in November.
Elsewhere in developed markets, European shares performed strongly as well. European shares have beaten earnings expectations at a rate of approximately 50%, helping propel stocks. Improvement in global trade outlook has also supported Europe, as prospects for better trade conditions with the U.S. may result from the improving conditions between the U.S. and China. In Japan, markets rose moderately despite negative consumer sentiment resulting from increasing sales taxes.
In addition to its now five-week winning streak, the S&P 500 and Dow Jones set new all-time-highs, besting the records it set back in July. While this is good news, the volatility in recent 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
Americans feel good about their financial situation, according to the University of Michigan. Americans have only reported higher sentiment four times in the last 40 years. Consumer sentiment is a critical health measure for the U.S. market, as healthy consumerism is the driving force behind the economy. As we move closer to the holiday season, healthy consumer sentiment bodes well for year-end revenues and holiday sales figures.
*Chart source: Bloomberg
Broad equity markets finished the week up, setting new all time highs, as investors were pleased remained upbeat on improved trade outlook.
For the fourth consecutive week, S&P sectors were mixed but skewed slightly positive, with real estate and utilities bottoming out -3.67% and -3.72% respectively. Financials and energy led the positive sectors with 2.43% and 2.01% respectively. Technology continues to lead the S&P sectors YTD with 38.71% growth.
Commodities rose slightly again this week, driven by oil climbing 1.85%. Oil markets have been highly volatile recently, driven largely by tensions and conflict in the Middle East. In addition to geopolitical tension, global demand concerns have added to uncertainty, with recent oil inventory numbers continually missing expectations by wide margins. U.S. – China trade optimism will likely add upward pressure on oil prices, and short term fears are mostly outweighing longer term trade prospects.
Gold prices dropped dramatically this week, falling 3.21% on new of progress in U.S. – China negotiations. The market is continuing to wrestle with macroeconomic factors to determine value. The U.S. – China trade deal will likely be the determining factor in longer term gold prices.
The 10-year Treasury yields jumped from 1.71% to 1.94% while traditional bond indices fell. Treasury yields improved on improved global macroeconomic outlook. The 10-2 year yield spreads widened, remaining near three-month-highs. Treasury yields will continue to be a focus as analysts watch for signs of a recession.
High-yield bonds improved slightly over the week, defying traditional bonds and treasury movements as credit spreads loosened slightly. High-yield bonds are likely to remain attractive in the long term as the Fed taken a neutral monetary stance, possibly having a mixed impact on current bonds’ longer term prospects.
Lesson to be Learned
Spend each day trying to be a little wiser than you were when you woke up.”
– Charlie Munger
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 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 27.68, 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 a relatively light week of economic data, investors will be following any new developments in the U.S. – China trade negotiations.
More to come soon. Stay tuned.