Earnings Lift Stocks; All Eyes On Fed
The S&P 500 and NASDAQ surged to fresh all-time highs as strong earnings from major technology and communications services companies boosted broader markets. The largest gains came on Friday as Alphabet (parent company of Google) reported better than expected results, as well as a plan to repurchase $25 billion of its shares. This lifted the communications sector over 3% for the day, helping the week to end on a positive note. Earnings season is about to enter its busiest week, but so far results have been generally better than expected.
With stocks moving higher, investors have been gearing up for the Federal Reserve meeting. Following the conclusion of the July 31 meeting, the Fed is expected to cut rates for the first time since 2008. Going into the week, the implied probability for a 0.25% rate cut is 76%, while there is a 24% probability of a larger 0.50% rate cut according to the CME Group’s FedWatch tool. Despite a relatively strong US economy, ongoing trade tensions and a gloomy global growth outlook have weighed on sentiment (the International Monetary Fund recently cut its global growth forecast for the fourth time in the past nine months).
2019 has been a great year for stocks so far, but it would not be unreasonable to expect an increase in volatility as earnings season continues and geopolitical tensions play out. This is why it is important to remain committed to a plan and maintain a well-diversified portfolio.
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 a better probability for long-term success. Including a broad mixture of asset classes can help with achieving more consistent long-term results, smoothing the short-term market noise and making it easier to weather market fluctuations.
Chart of the Week
Last week, the S&P 500 set fresh all-time highs as strong earnings from tech companies such as Facebook, Snapchat, and Google beat expectations. Interestingly enough, the US stock benchmark behaved similarly to last year as the Index secured new highs lasting through to September. Additionally, the chart below shows the S&P 500 posting 34 consecutive days of price movements under 1% as of Friday, July 26. This also seems to be mimicking last year, where we experienced a period of calm from late June lasting through early October.
*Chart source: Bloomberg
Broad equity markets finished the week mostly positive as domestic stocks fared better than international stocks. S&P 500 sectors were positive, with cyclical sectors outperforming defensive sectors.
So far in 2019, technology and consumer discretionary stocks are the strongest performers while healthcare has been the worst-performing sector.
Commodities were negative for the week as gold prices fell and oil prices rose. Oil prices increased by 1.02% to $56.20/bl. This comes after experiencing the largest decline in over two months as concerns over rising US crude inventories were priced in. However, prices rebounded last week on the back of US economic data and concerns about the safety of oil tankers in the Strait of Hormuz. Although the first estimate for Q2 GDP came in lower than the previous quarter, consumer spending increased driving some optimism into markets. Additionally, the market is pricing in tighter supply as tensions with Iran remain high.
Gold prices fell by 0.54%, closing the week at $1,418.60/oz as the market braces for the Fed announcement this week. Currently, 100% of market participants are pricing at least a 25-basis point rate cut, with some participants pricing in a 50-basis point cut. Since gold is US dollar-denominated, a larger-than-expected cut could consequently weaken the dollar and make the metal more attractive for foreign buyers. Gold also acts as a safe haven asset class in times of uncertainty. As geopolitical risks persist and fundamentals appear slightly overvalued, investors could continue to purchase the metal to hedge against uncertainty. Currently, gold prices sit near a 6-year high as the current economic environment has helped foster additional price increases.
The 10-year Treasury yield rose from 2.05% to 2.08%, resulting in negative performance for traditional US bond asset classes. Yields rose slightly as the first estimate of Q2 GDP growth slowed but was redeemed by impressive consumer spending figures. Additionally, the market is currently pricing in this week’s anticipated rate cut. However, following last week’s economic data, some participants are considering the Fed might not cut rates at all which would come as a surprise to markets.
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 large-cap US stocks leading the way and aggregate bonds lagging.
Lesson to be Learned
We do the worst possible thing at the worst possible time because we are most certain that we are right just when we are most likely to be wrong.”
– Jason Zweig
Investors often cost themselves money because of irrational short-term behavior. When exuberance or fear set in people tend to act on emotions, leading them to make decisions at the worst time. The best way to avoid this irrational behavior is to implement a plan with predefined steps to take ahead of time. If you stick with a plan and maintain a properly diversified portfolio, you increase your chances for a successful investment outcome in the long-run.
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 29.19, 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
Investors will continue watching results from Q2 earnings season as markets gear up for a July 31 Fed announcement.