September 17, 2018 Weekly Market Update
Global stocks experienced gains as the potential for renewed US – China trade discussions boosted markets.
With a lull between Q2 and Q3 earnings season, trade tensions have dominated headlines and caused increased volatility so far in September. However, stock markets received some relief after it was announced the US and China were open to resuming trade talks as US Treasury Secretary Steven Mnuchin sent an invitation to top Chinese officials, with the time and place still to be determined. While there is no guarantee another round of talks would provide an immediate successful outcome, any future discussions are believed to help make progress toward an agreement and avoid a full-blown trade war.
With trade tensions somewhat easing, the 10-year Treasury yield reached an intraday level of 3.00% for the first time since early August. Geopolitical concerns have caused longer-term bond yields to remain suppressed, but expectations of rising inflation and a strong economy have helped push yields higher in recent weeks. Despite the Consumer Price Index rising only 0.2% for the month compared to the expected 0.3% gain, many experts believe a tightening labor market and accelerating wage growth will eventually flow through to higher inflation levels (in the previous week it was announced average hourly earnings grew at the fastest pace since April 2009). The Fed is expected to continue gradually hiking rates, with the next rate hike anticipated following the September meeting as inflation has been trending mostly higher in 2018.
Strong earnings and economic data have continued to support US stock markets despite the ongoing geopolitical risks experienced so far this year. The prospects for the remainder of 2018 are somewhat positive for global stocks, but many experts believe volatility will remain prevalent in upcoming months as trade negotiations are discussed further (September is generally a more volatile month in general as many traders return to the office after August vacations). 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
China’s main stock exchange reached an unwanted milestone, closing at the lowest level since early 2014. Since the 2015-2016 crash, the Shanghai exchange has been slowly increasing and even contributed positively to emerging markets in 2017. However, as equity financing is becoming more stringent, companies are being forced to raise debt. Trade tensions with the U.S have also negatively impacted Asian markets. Supporting the fall in Chinese markets is the Yuan which has fallen almost 7 percent since the end of March amid rumors the Chinese government was allowing its currencies decline to combat U.S tariffs. Given the current geopolitical and domestic risk, investors are being more cautious about where they put their money internationally.
*Chart source: Bloomberg
Broad equity markets finished the week positive as international stocks experienced the largest gains. S&P 500 sectors were mostly positive with no discernible difference between defensive and cyclical sectors.
So far in 2018 technology, consumer discretionary and healthcare are the strongest performers while consumer staples, telecommunications, and materials have been the worst performing sectors.
Commodities were positive last week as oil prices increased 1.83%. Oil increased on the back of supply concerns as US oil inventories fell and the effect of Iranian sanctions have been felt. A new report from Bank of America shows that Iranian crude oil exports are down 580,000 barrels per day (bpd) in the last 3 months. In the OPEC group, Iran is the third largest producer.
Gold prices rose 0.12%, marking only the second increase in the last ten weeks. Easing geopolitical tensions helped the dollar soften, supporting the metal during the week. A weaker dollar makes gold, a dollar-denominated metal, less expensive to purchase for foreign investors.
The 10-year Treasury yield rose from 2.94% to 2.99%, resulting in negative performance for traditional US bond asset classes. While yields rose slightly, lingering trade tensions capped the upside, remaining near the key psychological level of 3%.
High-yield bonds were positive for the week as riskier asset classes experienced gains and the credit spread continues to tighten. 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.
Lesson to be learned
The best way to measure your investing success is not by whether you’re beating the market, but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.”
– Benjamin Graham.
It can be tempting to throw caution to the wind and chase the “next hot stock” when things are going well in the markets. However, the most successful investors are typically those who are able to maintain a disciplined approach to investing in all market conditions. By sticking to an emotion-free, methodical investment strategy, you can increase the odds of personal financial success in the long-term.
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 23.97, 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).