The S&P 500 closed at a record high as stronger than expected earnings and GDP boosted equity markets.
On Tuesday, the S&P 500 closed at a new all-time-high for the first time since September 20, 2018. This officially marked an end to the correction which began half a year ago. Since the low on December 24, the S&P 500 has rallied over 25% in just 80 trading days.
Propelling stocks to new highs were stronger than expected earnings and GDP data. So far, almost half of the companies in the S&P 500 have reported Q1 2019 earnings. While companies have reported an average earnings decline of -2.3% so far, this is better than the -4.3% expected just a couple weeks ago.
Beyond earnings, the US economy grew at a faster than expected pace during the first quarter. GDP grew at an annualized pace of 3.2%, far exceeding the 1.8% estimate. Despite the government shutdown and severe winter weather, the economy received support from the Fed’s pivot away from rate hikes and strong net exports.
While stocks have rallied significantly so far in 2019, it is important not to chase returns just because markets have been “hot.” There are still many reasons to remain cautious including slowing global growth, ongoing trade uncertainties, and a tight yield curve. It is reasonable to expect volatility to persist as markets remain sensitive to major headlines, hovering at new highs. Daily market noise can make it tempting to make knee-jerk decisions, but as investors we need to stay committed to our long-term financial goals and risk tolerance. 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 gained over 1% last week, pushing it to a new all-time high close of 2,939.88 on Friday. History shows the average correction is about 13% and the market typically takes four months to reach new highs. While the most recent correction was a little more severe (a 19.8% drop and seven months), the S&P 500 is now officially out of correction territory. As the widely followed large-cap US stock benchmark closed at an all-time high, the NASDAQ, a common benchmark for US technology stocks, also reached new highs. In the upcoming weeks, investors will be monitoring economic indicators to gauge whether the US economy can further support stock market gains.
*Chart source: Bloomberg
Broad equity markets finished the week mixed as small-cap stocks outperformed large-cap stocks. S&P 500 sectors were also mixed, with cyclical sectors outperforming defensive sectors.
So far in 2019, technology and communication stocks are the strongest performers while healthcare has been the worst performing sector.
Commodities were negative as oil prices decreased by 1.09% to $63.30/bl. This is the first weekly decrease in eight weeks. During the week, prices exhibited higher than usual volatility as the US announced it would not be renewing Iranian sanction waivers. This would ultimately tighten supply levels in the markets and apply upward price pressure. However, prices fell as President Trump claimed he demanded OPEC raise output to offset the impact of the sanctions.
Gold prices increased by 1.02%, closing the week at $1,284.90/oz. This is the first significant increase in a few weeks as the metal has been trading in a relatively tight range since March. Since gold is a US dollar-denominated asset class, it tends to perform best when interest rates are low, volatility is high, and supply and demand forces are stable. Last week, investors had more “surprises” than usual to deal with as economic and fundamental data came in. Additionally, trade negotiations remain a critical theme of 2019 and have the ability to determine the way markets move for the rest of the year.
The 10-year Treasury yield decreased from 2.57% to 2.51%, resulting in positive performance for traditional US bond asset classes. During the week, soft economic data from Europe drove yields lower. By week-end, positive economic data such as GDP coming in higher than expected should have driven yields higher, but investors remained cautious as they dug deeper into the report. Details revealed GDP growth was primarily driven by a rise in inventories and net exports rather than consumer spending.
High-yield bonds were positive for the week as riskier asset classes rose. 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 small-cap US stocks leading the way and traditional US bonds lagging behind.
Lesson to be Learned
Many people watch the prices of stocks they have recently sold more closely than the prices of those they still own; thus they show themselves to be more concerned with justifying past actions than in planning future ones”
– John Brooks
Hindsight bias leads us to believe an event was more predictable than it actually was. Unfortunately, this is an easy trap for many investors to fall into, reliving how they would have “acted differently” now knowing the circumstances of today. We need to be careful when evaluating how past events actually impact current market conditions. The past cannot be changed, but we still have the ability to adhere to a smart investment strategy and make our portfolio better in the future. Removing emotions from the investment process can help us avoid biases like hindsight, keeping us focused on what really matters – our plan moving forward.
FormulaFolios 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 30.10, 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).
The Week Ahead
Investors will continue to closely monitor earnings as another slew of companies report results this week. The Federal Open Market Committee is also expected to keep rates unchanged in the upcoming meeting