Week in Review
Despite a turbulent start to the week, US stocks pushed higher after it was announced the US and China would resume trade talks.
Turkey’s currency, the lira, plummeted to an all-time-low against the dollar on Monday. This caused global stock markets to begin the week on a negative note as the ongoing geopolitical and economic issues in Turkey continued to rattle investors. Turkish President Recep Tayyip Erdogan has received criticism for not allowing the central bank enough independence to raise interest rates despite an overheating economy and inflation now exceeding 15%, which is well above the central bank’s target of 5%. As concerns have become more apparent in recent weeks, Standard & Poor’s, one of the “Big-Three” credit-rating agencies, lowered its credit rating on Turkey and forecast a recession for the country by next year.
While markets were choppy earlier in the week, global stocks climbed higher Thursday and Friday as it was announced President Trump and Chinese President Xi Jinping hope to discuss trade differences at a summit in November. The world’s two largest economies have been locked in escalating rounds of tariffs since early March, weighing on investor sentiment. Many experts believe taking the possibility of a continued trade war between the US and China off the table could give a year-end boost to riskier asset classes such as stocks, as this has been one of the markets biggest worries.
Strong earnings and economic data reports have been largely offset by negative geopolitical news throughout the year. Though the prospects for the remainder of 2018 are still somewhat positive for global stocks, especially if the US and China can come to a trade agreement, many experts believe volatility will remain prevalent in upcoming months. This is why it is important to remember to include a broad range of asset classes in your portfolio. While the day-to-day noise can make it tempting to make knee-jerk decisions, as investors we need to stay committed to our long-term financial goals. 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.
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Chart of the week
The S&P 500 closed the week within 1% of a fresh all-time-high and remains within the broad range of the upward trend that begin in mid-February 2016. Shorter-term momentum has turned more bullish in recent months as support has held near the bottom of the trading range multiple times since February. If the S&P 500 is able to reach a new all-time-high and break through this resistance level, it could result in a tailwind for the Index. The coming weeks should continue to provide valuable insight about the near-term direction of the S&P 500, but things seem to have firmed following the volatility experienced earlier in the year.
*Chart created at StockCharts.com
Broad equity markets finished the week mixed as large-cap US stocks experienced the largest gains and international stocks experienced losses. S&P 500 sectors were mixed with defensive sectors broadly outperforming cyclical sectors.
So far in 2018 technology, consumer discretionary, and healthcare are the strongest performers while telecommunications, consumer staples, and materials have been the worst performing sectors.
Commodities were negative as oil prices fell 2.54%. This was the seventh straight week of oil price declines as troubled emerging market economies have been dampening the outlook for global fuel demand. Furthermore, US government data this week showed a large surprise build-up in crude oil inventories and rising production, fueling the fear of oversupply in the near-term.
Gold prices were negative with a 2.86% loss – the sixth consecutive weekly decline for the metal. This was the largest weekly loss for gold since May 2017 as the dollar continued to rally on the back of Turkey fears. A generally stronger dollar has resulted in downward pressure for gold in recent months as it has made the metal more expensive for holders of other currencies.
The 10-year Treasury yield finished the week unchanged at 2.87% while traditional US bond asset classes experienced positive performance. Yields steadied at the end of the week as the positive news regarding US and China trade relations boosted investor sentiment.
High-yield bonds were positive for the week as some riskier asset classes experienced gains and credit spreads remained relatively stable. 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 small-cap US stocks leading the way and international stocks lagging behind.
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.
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 22.97, forecasting further economic growth and not warning of a recession at this time. The Bull/Bear indicator is currently 100% bullish – 0% neutral – 0% bearish. This means the indicator believes there is a slightly higher than average likelihood of stock market increases in the near term (within the next 18 months).