Markets Rebound Following Worst Week of 2019

Markets Rebound

Following the worst week of 2019, major indices rebounded, closing at multi-month highs.Stocks posted strong gains for the week, boosted by US –China trade talk optimism. Early in the week, China’s central bank pledged not to devalue currency to boost exports. This has been a major sticking point in the ongoing trade negotiation. Without releasing specific details, Yi Gang, Governor of People’s Bank of China, also announced “the two sides reached consensus on many crucial and important issues.” While it is unlikely a deal will be finalized by the end of March. As some had previously thought, the two sides seem to be closing in on an agreement.

The positive news sent the S&P 500 to a four-month high. Breaking through the resistance level of 2,800. Since dropping from its all-time-high in late September, the Index had reached 2,800 on four separate occasions. Only to be followed by a sell-off quickly after. However, the S&P 500 has been able to remain above this threshold for three consecutive trading days, closing the week at 2,822. This illustrates a potential breakout to retest all-time-highs as investor sentiment continues to improve.

Stocks Update

Stocks have rallied significantly since the late December lows. With the S&P 500 gaining over 20% since Christmas – bringing it within 4% of a new all-time-high. Following such a strong rally to start the year, the potential for continued gains seems to be hinging on a US-China trade deal. Trade tensions have been a constant source of volatility over the past year, but optimistic reports have boosted investor sentiment in recent months. However, there are also still reasons to remain cautious, such as softening global growth and Brexit uncertainty. With conflicting signals and data, it is reasonable to expect volatility to persist as markets remain sensitive to major headlines.

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.

Table of Contents

Chart of the Week

After dropping over 2% last week on the back of poor economic data and rising geopolitical uncertainty, the MSCI World Index rose 2.8%, marking its strongest weekly return in almost four months. This came as China stated its continued commitment to economic stimulus at a time where global economic growth seems to be slowing down. In the upcoming week, investors will be cautiously watching central bank policy decisions from the US, UK, and Brazil, with the consensus that global monetary policy will stay accommodative.

*Chart source: Bloomberg

Market Update

Equities

Broad equity markets finished the week positive as large-cap stocks experienced the largest gains. S&P 500 sectors were mostly positive. 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

Commodities were positive as oil prices increased by 4.37% to $58.52/bl. This marks the second consecutive weekly increase for the commodity since falling to the $55/bl level a few weeks ago. Fueling the rise in prices was China’s commitment to economic stimulus and data that showed China, the world’s biggest oil importer, used a record 12.68 million barrels per day in the first two months of 2019. Year-to-date, oil prices are up over 29%.

Gold prices increased by a mild 0.28%, closing the week at $1,302.90/oz. This is the metal’s second time breaching the $1,300 level this year as investors remain cautiously aggressive in equity markets. However, since the metal is a safe haven asset, it tends to perform best when there is increased volatility in the markets. If current geopolitical tensions were to persist and economic data were to deteriorate, gold could prove to be an illustrious investment in this low-interest rate environment.

Bonds

The 10-year Treasury yield decreased from 2.62% to 2.59%, resulting in positive performance for traditional US bond asset classes. This is the lowest level year-to-date as investors remain cautiously optimistic. Additionally, possible headwinds remain as both Brexit and the US – China trade are ongoing. In the upcoming week, investors will be watching the Federal Open Market Committee meeting to determine what monetary policy might look like going into the year.

High-yield bonds were positive for the week as riskier asset classes 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 small-cap stocks leading the way and traditional US bonds lagging behind.

Lesson to be Learned

“Spend each day trying to be a little wiser than you were when you woke up.”

– Charlie Munger
Financial markets are constantly changing and evolving. As investors, we need to remain agile and able to shift with broad market trends. However, many people have difficulty parting with a losing investment because “they just know it is going to turn around soon.” Eliminating emotions from the investment process can help with this. By taking emotions out of the equation, investors can make decisions based on rational information rather than their feelings, increasing the odds of success in the long-run.

Indicators

Our investment team 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 33.40, 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 Federal Reserve will conclude its next meeting on Wednesday, March 20. While the Fed is expected to leave interest rates unchanged, investors will be watching for hints regarding future policy.

Read last week’s Investment Update.