June 18, 2018 Weekly Market Update

Markets were mostly stable during the week, barring a handful of intraday movements, as investors digested major macroeconomic events.
As expected, the Federal Reserve (Fed) announced its second rate hike of the year, increasing the federal funds rate by a quarter of a percent to a range of 1.75% to 2.00%. However, while many investors were expecting the rate hike, Fed policymakers signaled a potential acceleration to the pace of rate hikes through the remainder of 2018. The Fed upgraded its rate-hike forecast from three to four increases this year; specifically, eight Fed policymakers predicted four quarter-point rate hikes, compared to only seven officials at March’s meeting. The Fed noted that economic growth appears favorable, supported by strong employment and business spending, justifying further gradual rate increases.
While investors shrugged off a more-hawkish Fed, broad equity markets opened sharply lower on Friday as President Trump imposed tariffs on $50 billion worth of Chinese goods. China immediately announced it would impose tariffs on $34 billion of US goods, with another $16 billion in goods subject to tariffs later. These tariff announcements put a damper on sentiment to end the week, although major indices finished well above their low levels for the day.
Corporate earnings and economic data have remained mostly positive, but many macroeconomic and geopolitical risks remain present. Despite various major indices reaching new all-time highs recently, markets have been volatile since early February. Economic data and market sentiment can change quickly, which is why it is important to include a broad range of asset classes in your portfolio, in an effort to reduce risk.
As investors, we need to stay committed to our long-term financial goals. This, along with 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 Fed announced the second rate hike of the year on Wednesday. While the Fed has been gradually increasing rates over the past few years, this was only the seventh time rates have been increased since the 2008 financial crisis, and rates remain relatively low. As depicted in the chart below, the Fed is taking a more-cautious approach than it did from 2004 to 2007 when rates were increased 17 times.

Market Update


Broad equity markets finished the week mixed. US small-cap stocks led, while US large-cap stocks lagged. S&P 500 sectors were also mixed, with defensive sectors broadly outperforming cyclical sectors.
So far in 2018, technology, consumer discretionary, and healthcare have been the strongest performers, while telecommunications, consumer staples and utilities have struggled.


Commodities were negative as oil prices fell 1.03% – its fourth consecutive weekly drop. OPEC is set to meet in Vienna on Friday, June 22, and many investors expect the group will agree to boost output after 18 months of production restriction. These production cuts have supported a positive longer-term trend, but the uncertainty surrounding the upcoming meeting has created downward pressure on oil prices in recent weeks.
Gold prices were negative with a 1.81% loss as the dollar index strengthened. The metal has been somewhat supported by geopolitical concerns this year, but worries about a stronger dollar has weighed on prices in recent months.


The 10-year Treasury yield remained at 2.93%, resulting in slightly positive performance for traditional US bond asset classes. Yields climbed over 3% immediately following the Fed rate-hike decision on Wednesday, but fell at the end of the week as the European Central Bank left interest rates steady in the eurozone and tariff worries pushed investors to more safe-haven asset classes.
High-yield bonds were positive for the week as credit spreads tightened. 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 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 the most appropriate times to take risk and to hedge risk.


Our investment team has two simple indicators that can help you measure the health of the economy. The first indicator is the Recession Probability Index, or RPI, and the second is the US Equity Bull/Bear Indicator, which tells us whether the US stock market is strong (bull) or weak (bear).
The RPI reading ideally should be on the lower end on a scale of 1 to 100, while the US Equity Bull/Bear Indicator reading should ideally be at least 67% bullish. When these two readings are ideal, our research shows that market conditions are at their strongest and least volatile.
The RPI has a current reading of 23.07, forecasting further economic growth, with no warning of a recession risk at this time. The US Equity Bull/Bear indicator is currently 50% bullish and 50% bearish. This indicates a neutral outlook on stock-market direction in the near term (within the next 18 months).

The Week Ahead

The OPEC meeting on June 22 will be in focus as investors look for guidance on potential oil-production increases.

Read May 15 Investment Update.

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