August 28, 2018 Weekly Market Update from Physicians Thrive

The widely followed S&P 500 Index reached a new all-time-high, officially putting an end to the correction that started early in the year.

Since closing at 2,872.87 on January 26, the S&P 500 has struggled to find positive momentum. By February 8 (just 9 trading days later), the Index had dropped over 10%, entering official correction territory. However, after months of heightened volatility and geopolitical uncertainties, the S&P 500 closed at a new all-time-high on Friday, reaching 2,874.69. With this fresh high level, the bull market that began in March 2009 is now 3,455 days old – surpassing the October 1990 to March 2000 run as the longest bull market on record by most definitions.

Meanwhile, Federal Reserve Chairman Jerome Powell provided a boost to stocks on Friday following his speech at the annual economic symposium in Jackson Hole, Wyoming. Though this was not an official Fed meeting announcement, Powell said gradual interest rate hikes continue to be the best way to protect economic recovery and maintain strong job growth while keeping inflation under control. These comments reassured investors the Fed will likely continue on the current expected path of rate hikes, and investors like consistency.

While the bull market may be aging, strong earnings and economic data illustrate there may still be potential gains ahead barring further unforeseen geopolitical risks. Though the prospects for the remainder of 2018 are somewhat positive for global stocks, many experts believe volatility will remain prevalent in upcoming months as trade negotiations are discussed further. 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.

 

Chart of the week

The S&P 500 officially closed at a fresh all-time-high on Friday 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. The new high water mark for S&P 500 may result in a tailwind for the Index as this psychological resistance level has been broken. 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.

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Market Update

Equities

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 broadly outperforming defensive 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.

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Commodities

Commodities were positive as oil prices rose 4.26%, snapping a seven-week losing streak. Oil prices were supported by a larger than expected decline in US inventories, but concerns about slowing global demand (especially in emerging market economies) capped gains.

Gold prices were positive with a 2.53% gain – the first weekly increase since early July. Comments by President Trump disagreeing with the Fed’s decision to continue raising interest rates put downward pressure on the dollar, supporting gold prices as a weaker dollar makes it less expensive for holders of other currencies to purchase the metal.

Bonds

The 10-year Treasury yield fell from 2.87% to 2.82, resulting in positive performance for traditional US bond asset classes. Yields fell on Monday after President Trump criticized the Fed for recent rate hikes, but steadied during the remainder of the week as further gradual rate hikes are expected.

High-yield bonds were positive for the week as riskier asset classes experienced gains and credit spreads fell slightly. 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.

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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.

 

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 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).

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