As expected, the Fed cut interest rates for the first time since 2008, lowering its benchmark rate by 0.25% on Wednesday. The decision to lower rates was made to help prolong the current economic expansion in the face of ongoing trade tensions and slowing global growth. However, in a press conference following the decision, Fed Chairman Jerome Powell stated this did not mark the beginning of a long series of rate reductions. Investors were hoping for another potential rate cut later in 2019, so the remarks sent major stock indices lower.
Markets continued to slide through the remainder of the week as trade tensions between the US and China escalated. On Thursday, President Trump said the US would put a 10% tariff on another $300 billion of Chinese goods starting September 1. This sent markets reeling as investors flocked to safe-haven asset classes, resulting in the worst week of the year for stocks.
While stocks trended lower, other asset classes were able to hold-up. For example, gold finished the week with a 1.77% gain while REITs were up over 1%. This is why it is important to remain committed to a plan and maintain a well-diversified portfolio.
Flashy news headlines can make it tempting to make knee-jerk decisions, but sticking to a strategy and maintaining a portfolio consistent with your goals and risk tolerance can lead to smoother returns and a better probability for long-term success.
Chart of the Week
The S&P 500 posted its worst week since last December as trade tensions between the US and China escalated while the Fed seemed to not be as dovish as markets hoped. Fed President Jerome Powell indicated that the most recent rate cut of 25bps might be a temporary diversion as opposed to the beginning of a trend. Additionally, by week-end President Trump announced tariffs on remaining Chinese goods as the relationship between the two of the worlds’ largest economies continues to deteriorate. As the market fell 3.1% in five days, it is important to remember that slight market pullbacks can be healthy as prices return to more sustainable levels.
*Chart source: Bloomberg
So far in 2019, technology and real estate stocks are the strongest performers while energy has been the worst-performing sector.
Commodities were negative for the week as oil prices decreased by 0.96% to $55.66/bl. Prices fell as trade tensions between the US and China escalated. Investors are now pricing in the possibility of crude demand being limited if China were to retaliate. Additionally, the IMF recently lowered its global growth forecast again citing trade tensions as a reason. Year-to-date, oil prices are up 20%, 26% lower than its year-to-date high in April.
Gold prices rose by 1.77%, closing the week at $1,457.50/oz. During the week, the Fed announced an interest rate cut of 25 basis points putting the effective fed rate at a range of 2.00-2.25%. As the market priced in lower interest rates, gold – a US dollar-denominated asset, rose as it became more attractive to foreign investors. Additionally, since equities experienced a rough week on the back of rising trade tensions, investors rushed into safe-haven assets. Currently, gold prices sit near a 6-year high as the current economic environment has helped foster additional price increases.
The 10-year Treasury yield fell from 2.08% to 1.86%, resulting in positive performance for traditional US bond asset classes. Yields hit the lowest level since November 2016 as trade fears rippled through markets. Additionally, although the Fed seemed to hint there will be no further rate cuts, the market seems to have priced in at least one more rate decrease for this year.
High-yield bonds were negative for the week as riskier asset classes fell and credit spreads loosened. However, 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 large-cap US stocks leading the way and aggregate bonds lagging.
Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard.”
– Warren Buffett
Too often, investors get caught up in the daily values of their portfolios. During periods of heightened volatility, it can be especially tempting to make knee-jerk decisions in reaction to recent market movements. However, if you are too focused on short-term results it can come at the detriment of long-term gains. This is why it is important to implement a plan with predefined steps to take ahead of time. If you stick with a plan and maintain a properly diversified portfolio, you increase your chances for a successful investment outcome in the long-run.
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 28.76, forecasting further economic growth and not warning of a recession at this time. The Bull/Bear indicator is currently 100% bullish – 0% 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).
With the recent escalation in trade tensions, investors will be watching to see how markets react to the negative geopolitical sentiment.