September 4, 2018 Weekly Market Update

Stocks jumped higher early in the week on optimism regarding US – Mexico trade talks. However, investor sentiment fell later in the week as Canada failed to reach an agreement in the deal which is hoped to eventually replace NAFTA. Furthermore, President Trump announced he is considering implementing $200 billion of new tariffs on Chinese goods, sending jitters throughout global markets.

While geopolitics continue to dominate headlines, the second estimate of US GDP helped confirm economic growth remains strong. The revised data showed the US economy grew 4.2% in the second quarter, slightly higher than the initial reading of 4.1%. This was the strongest growth rate since 2014, bolstered by strong consumer spending.

Strong earnings and economic data have continued to support US stock markets despite the ongoing geopolitical risks. Though the prospects for the remainder of 2018 are somewhat positive for global stocks, 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

So far in 2018, there has been a clear divergence between US and international stocks. However, this trend was not necessarily present until mid-May, when trade tensions began heating up. Since trade concerns started dominating headlines, international stocks (green and purple lines) have been suppressed while US stocks (red and blue lines) have moved higher. Though some investors have been scared away from international stocks in recent months, many analysts believe there is opportunity for a rebound in overseas markets if trade negotiations take a more positive tone as global economic growth remains relatively strong.

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*Chart created at StockCharts.com

 

Market Update

Equities

Broad equity markets finished the week positive as large-cap US stocks experienced the largest gains. S&P 500 sectors were mixed with cyclical sectors broadly outperforming defensive sectors.

So far in 2018 technology, consumer discretionary, and healthcare are the strongest performers while telecommunications, consumer staples, and materials have been the worst performing sectors.

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Commodities

Commodities were positive as oil prices rose 1.57%. Impending US sanctions on Iran and falling Venezuelan output helped boost prices during the week. However, oil prices are still off the high levels experienced in early July as some economists are worried a trade war could cause a drag on global growth, eroding demand.

Gold prices were negative with a 0.50% loss – the seventh weekly decline in the past eight weeks. Escalating trade conflicts between the US and China pushed emerging market currencies lower, supporting strength in the dollar. A stronger dollar makes it more expensive for holders of other currencies to purchase gold, pushing the price of the metal lower.

Bonds

The 10-year Treasury yield increased from 2.82% to 2.86, resulting in negative performance for traditional US bond asset classes. While yields rose slightly, resurfacing trade frictions capped the upside.

High-yield bonds were mostly flat for the week as tighter credit spreads offset higher broad interest rates. 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.

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Lesson to be learned

The emotional burden of trading is substantial; on any given day, I could lose millions of dollars. If you personalize these losses, you can’t trade.”

– Bruce Kovner

Investing can trigger many emotions – even for the most seasoned professionals. However, if you want to be a successful investor, you have to disconnect your feelings from what’s happening in the market. By sticking to an emotion-free, disciplined investment strategy, you can increase the odds of success in the long-term.

 

Indicators

The Physicians Thrive 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 22.97, 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).

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