Week in Review
Trade tensions continued to plague market sentiment as major global stock indices moved lower during the week. The week began on a negative note as the Trump administration threatened to block Chinese access to US technology, causing the tech-heavy NASDAQ composite to fall more than 2% on Monday. However, broad markets were mostly flat for the remainder of the week as President Trump said he would back congressional efforts to give new powers to the existing Committee on Foreign Investment in the United States, likely resulting in less severe restrictions than initially anticipated.
As many investors focused on the continued trade dialogue, many large US banks quietly passed the second round of the central bank’s stress tests. These stress tests, which examine what would happen to banks under hypothetical difficult economic conditions, are administered annually as a result of the 2008 financial crisis. With most banks receiving a clean bill of health, several announced plans to return capital to shareholders in the form of higher dividends and share buybacks. This could be a positive for broad markets as financials is the third largest sector in the S&P 500 but has been lagging in 2018 after a strong year last year.
While market fundamentals remain mostly healthy, pointing to further long-term economic growth, many investors expect heightened volatility in the near-term as trade talks dominate headlines. The day-to-day noise can tempt even the most intelligent investors to make knee-jerk decisions. However, 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 Dow Jones Industrial Average closed the week below its 200-day simple moving average during the week. This is generally considered a bearish signal as closing below a long-term moving average can indicate an asset class has started a clear downward trend. However, the last time this happened was in mid-2016 immediately following Brexit. Similar to the current investment environment, the Brexit scare was geopolitically driven, and markets were able to quickly recover and rally for an extended period of time as market fundamentals remained strong. No indicators work 100% of the time, but it will be important to see if the Index can recover similarly to 2016, or if a more prominent bearish pattern continues to form in the upcoming weeks / months.
*Chart created at StockCharts.com
Broad equity markets finished the week negative as small-cap US stocks experienced the largest losses. S&P 500 sectors were mixed with defensive sectors broadly outperforming cyclical sectors.
So far in 2018 consumer discretionary, technology, and energy are the strongest performers while telecommunications, consumer staples, and industrials have been the worst performing sectors.
Commodities were positive as oil prices jumped 8.12% – the second consecutive week with an increase of over 5%. While OPEC and Russia recently agreed to increase production, US sanctions against Iran threatened to remove a substantial amount of volume from the markets. Iran is the fifth largest oil producer in the world, so strict enforcement of the sanctions could actually reduce global oil supply even as other countries increase production.
Gold prices were negative with a 1.27% loss. A generally stronger dollar has resulted in downward pressure for gold in recent months, but the metal has also been somewhat supported by geopolitical concerns, helping provide support from further downside risk.
The 10-year Treasury yield fell from 2.90% to 2.85%, resulting in positive performance for traditional US bond asset classes. Despite the recent Fed rate hike, yields have remained suppressed in recent weeks as trade war fears have caused investors to shift toward more safe-haven asset classes.
High-yield bonds were negative for the week as riskier asset classes experienced downward pressure. However, 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
All you need for a lifetime of successful investing is a few big winners, and the pluses from those will overwhelm the minuses from the stocks that don’t work out.”
– Peter Lynch.
Nobody likes to lose money, but losses are an inevitable part of investing. The key is to control your losses and manage downside risk intelligently, so you are in the best position possible to take advantage of larger market upswings. By sticking to an emotion-free, disciplined investment strategy, you can increase the odds of success in the long-term by determining when it is most appropriate to take risk and when it is more appropriate to hedge risk.
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 23.07, forecasting further economic growth and not warning of a recession at this time. The Bull/Bear indicator is currently 50% bullish – 50% bearish. This means the indicator has a neutral outlook on stock market direction in the near term (within the next 18 months).
The Week Ahead
While trade talks continue to dominate headlines, the most recent jobs report will be released Friday morning. This report should shed some light on the health of the US economy.