September 25, 2018 Weekly Market Update
Broad stock markets advanced for the week as investors looked past rising interest rates and trade tensions.
The Dow Jones Industrial Average reached its first record high since late January as trade-sensitive stocks experienced strong gains. On Monday, the Trump administration announced the implementation of 10% tariffs on $200 billion in Chinese goods. If a resolution is not reached by year-end, these tariffs will rise to 25%. While this heightens the trade conflict between the US and China, starting the tariffs at 10% suggests the US is using this as a negotiation tool rather than jumping straight to a more aggressive level, boosting investor sentiment.
As investors shrugged-off further trade tensions, the 10-year US Treasury yield closed above 3.00% for the first time since May. Strong economic data provided support for higher rates as jobless claims fell to 201,000 – the lowest level since 1969. The steady decline of jobless claims this year has reflected robust job creation and confidence in the labor market. With the US economy remaining healthy, market participants are expecting a rate hike following the upcoming Fed meeting later this week, which could push interest rates to fresh multi-year highs.
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
The S&P 500 officially closed at a fresh all-time high on Friday and has continued an upward trend since March. Trade-sensitive sectors such as materials, industrials, and financials helped propel the index into new highs intra-week. Despite new tariffs being imposed on China, news that Shanghai will be cutting the average tariff rate on imports from a majority of its trading partners lifted markets. Though volatility has been playing a large role this year, strong fundamentals and positive economic news continue to drive positive returns in 2018.
*Chart source: Bloomberg
Broad equity markets finished the week mixed as international stocks experienced the largest gains and small-cap US stocks experiences losses. S&P 500 sectors were mostly positive with cyclical sectors outperforming defensive sectors.
So far in 2018 consumer discretionary, technology and healthcare are the strongest performers while consumer staples and telecommunications are the only negative sectors.
Commodities were positive last week as oil prices increased 2.59%. Current crude oil prices are near four-year highs as the market continues to recover from the severe correction experienced in 2014. Helping support prices is the US sanctions on Iran. Analysts estimate these sanctions will lower oil supply by 1 million barrels a day. Amidst the news, OPEC nations are discussing potentially increasing supply by 500,000 barrel a day.
Gold prices rose 0.10%, marking only the third 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 2.99% to 3.07%, resulting in negative performance for traditional US bond asset classes. While yields rose past the key psychological level of 3%, rates are holding steady ahead of this weeks Fed decision. Investors will be paying attention to whether the FOMC message appears to be hawkish or dovish, providing more clarity for the remainder of the year.
High-yield bonds were slightly negative for the week as gains in riskier asset classes helped somewhat offset the negative impact of higher interest rates. 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 small-cap US stocks leading the way and traditional bond categories 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 discipline 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).