With Q2 earnings season just around the corner, investor sentiment has been mostly driven by geopolitics in recent weeks. Though markets were mixed during the week as investors prepared for the G20 Summit meetings, June was an overall positive month for stocks. The S&P 500 gained 6.89% during the month – its strongest June gain since 1955. This helped the Index rally to its best first half of a year since 1997 (in the run-up to the dot-com bubble).
As markets rallied higher in June, investors appear to remain cautiously optimistic. Over the past year, defensive sectors such as utilities have been outpacing cyclical sectors such as technology. Analysts attribute this to a combination of slowing global growth, trade worries, and falling interest rates. The level of cautious optimism can be further illustrated in the most recent consumer sentiment data which fell in June but remains relatively high by historical standards.
While the June rally helped stocks rebound from May’s losses, the past few months illustrates how important it is to stay committed to a plan and maintain a well-diversified portfolio. Stocks have been volatile, but other asset classes (such as gold, REITs, and bonds) have experienced more steady, positive performance.
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 is imperative 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 these common volatility storms.
Gold recorded its largest monthly return in two years as the prospect of lower interest rates attracted investors. Since the metal is a US dollar denominated safe-haven asset class, it typically performs best when volatility is high and interest rates are low. Recently, investors have been purchasing gold as an attempt to hedge against geopolitical risks, especially ahead of the G20 Summit and additional China-US trade talks. As the metal pushed past the $1,400 level, price momentum and volatility may drive additional returns.
*Chart source: Bloomberg
Broad equity markets finished the week mixed as small-cap US stocks fared better than large-cap stocks. S&P 500 sectors were also mixed, 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 positive for the week as oil prices increased 1.81% to $58.47/bl. This is the second consecutive weekly increase as the prospects of tighter oil supply rippled through markets. However, a recent government report showed that US crude and product shipments hit the highest level since 1990. In recent years, oil prices have been especially sensitive to US crude inventory levels. Geopolitical risks have also been playing a part in oil prices as the United States relationship with Iran continues to deteriorate and additional sanctions being placed on the Arab nation.
Gold prices rose by 1.10%, closing the week at $1,411.60/oz. This is the second consecutive weekly gain and the first time the metal closes over $1,400/oz since August of 2014. Throughout the week, events such as additional sanctions being placed on Iran, uncertainty surrounding President Trump and President Xi of China meeting at G20, and stock market volatility drove investors into the metal. Additionally, price momentum has been relatively strong, though some indicators are signaling the metal might currently be overbought. However, gold has the potential to continue to rise as risks stack up and the prospects of lower interest rates remain on the horizon.
The 10-year Treasury yield fell from 2.07% to 2.00%, resulting in positive performance for traditional US bond asset classes. During the week, Treasury yields fell on both the short and long end of the yield curve as the Fed signaled a willingness to cut rates if market and economic activity deteriorate. Certain economic data coming in below analyst expectations, especially manufacturing gauges, provides a potential case for lower interest rates. However, the economy as a whole remains relatively healthy and if indicators were to rebound or continue to improve in some instances, a rate cut might be avoided all together.
High-yield bonds were negative for the week as riskier asset classes were mixed and credit spreads loosened. However, 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 behind.
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.
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 26.39, forecasting further economic growth and not warning of a recession at this time. The Bull/Bear indicator is currently 66.67% bullish – 33.33% 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).