April 17, 2018 Weekly Update

Broad equity markets experienced strong gains during the week as investors geared up for the start of Q1 2018 earnings season. Bolstered by a sturdy economy and December’s corporate tax cuts, the blended earnings growth rate for the S&P 500 is expected to be 17.3%, which would mark the strongest quarter of growth since Q1 2011.
With investors expecting mostly positive earnings reports, the S&P 500 climbed almost 2% for the week. This was the seventh consecutive week in which the Index moved up or down by more than 1%. The S&P 500 has now advanced or declined by more than 1% in 13 of the 15 weeks so far in 2018, with only 13 such weeks in all of 2017.
Despite the optimistic outlook for upcoming corporate earnings, geopolitical anxieties remained prevalent. While concerns regarding a global trade war via the recent bout of tariffs between the US and China seemed to somewhat dissipate, rising tensions surrounding Syria appear to have taken their place. Political news has been a driving force in the markets in recent months, but analysts are hoping a strong earnings season can help shift attention back to fundamentals.
While markets have been volatile in recent months, it is important to stay focused on the bigger picture. Even in the strongest of bull markets, stocks will not rise every day / week / month / quarter, and periodic pullbacks should be expected. These pullbacks can even be considered healthy for the continuation of a longer-term bull market. Higher levels of volatility can be expected during short-term market corrections, but the longer-term prospects of 2018 remain mostly positive as corporate earnings and economic fundamentals remain strong.
Short-term market corrections are only a small blip on the radar for long-term investors. However, economic data and market sentiment can change quickly. This is why it is still important 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.
As investors, we need to stay committed to our long-term financial goals. All the short-term news and market movements can be the most debilitating of all when it comes to making sound investment decisions; especially if we allow them to influence knee-jerk decisions.

Chart of the week

The S&P 500 finished the week positive, though equity markets remained volatile. While shorter-term momentum has pushed the S&P 500 lower, longer-term momentum remains intact as the Index is still within the trading range that has been in place over the past two years. The Index briefly fell through the lower bound of this trading range (as well as its 200-day simple moving average) two weeks ago, but rallied to close the week right at the lower threshold. Due to the continued support near this level, there may be a continuation of the longer-term bull market despite the shorter-term weakness. However, if the Index falls (and remains) below this support threshold for a longer period of time, it could result in further downward pressure as markets fall into a more bearish posture. The coming weeks should continue to provide valuable insight about the near-term direction of the S&P 500, but it seems to remain in a long-term bullish pattern for now.


Market Update 


Broad equity markets finished the week positive as small-cap US stocks experienced the largest gains. S&P 500 sectors were mixed with cyclical sectors outperforming defensive sectors.
So far in 2018 technology and consumer discretionary are the only sectors with positive performance, while all other sectors are displaying negative performance year-to-date. Telecommunications, consumer staples, and real estate have been the worst performing sectors so far this year.


Commodities were positive as oil prices spiked 8.59% – the largest weekly gain since July 2017. While OPEC-led production cuts have supported a longer-term positive trend in oil prices, the escalating geopolitical tensions surrounding Syria sent prices soaring during the week due to the country’s relationship with other strong oil producers (such as Russia).
Gold prices were positive with a 0.88% gain as the dollar index declined for only the second time in the past eight weeks. A relatively weaker dollar, combined with geopolitical uncertainties, has supported the metal so far this year.


The 10-year treasury yield increased from 2.77% to 2.82%, resulting in negative performance for traditional US bond asset classes. Yields had been trending higher since late last year, but have been unable to surpass the high of 2.94% set in late February as there has been increasing demand for more safe-haven asset classes with the recent market volatility.
High-yield bonds were positive for the week as credit spreads fell sharply, with investors shifting focus to strong underlying fundamentals. As long as the economy remains healthy, higher-yielding bonds are expected to continue outperforming traditional bonds in the long-run as the risk of default is moderately low.
Asset class indices are mixed so far in 2018, with commodities leading the way and traditional bond categories lagging behind.

Lesson to be learned:

The investor’s chief problem – and even his worst enemy – is likely to be himself.”

– Benjamin Graham
People are emotional, and possess many biases when it comes to investing. A couple examples of these biases include hindsight (looking back and thinking it was easy to predict how things actually played out) and illusion of control (the tendency for people to overestimate their ability to control events they cannot actually influence). Unfortunately, these biases make us more susceptible to short-term market noise and poor investment decision making. This is why it is important to maintain a disciplined, emotion-free, investment strategy.


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 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 21.60, forecasting further economic growth and not warning of a recession at this time. The Bull/Bear indicator is currently 83% bullish. This means our models believe there is a slightly higher than average likelihood of stock market increases in the near term (within the next 18 months).

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