Immediately following the worst week of 2019, US stocks posted the best weekly gain so far this year on Fed rate cut hopes. Stocks surged on Tuesday after US Federal Reserve Chairman Jerome Powell said the Fed was closely monitoring potential negative impact the ongoing trade wars could have on the economy. Powell stated the Fed would “act as appropriate to sustain the expansion,” indicating a willingness to ease monetary policy sooner rather than later.
Stocks received another boost on Friday after a disappointing jobs report (you read that correctly). Payrolls increased by only 75,000, missing the expected gain of 180,000 for the month. While the unemployment rate remained steady at 3.6%, wage growth slowed more than expected. This lackluster data fueled market expectations for a rate cut later this year as the labor market continues to tighten. The implied probability for a rate cut by July is now at 79% according to the CME Group’s FedWatch tool.
With the strong weekly gains, the S&P 500 erased a large portion of its May losses, bringing the index within 2.5% of its all-time-high closing level from late April. However, recent weeks illustrate how important it is to stay committed to a plan and maintain a well-diversified portfolio. While stocks have been volatile since early May, other asset classes (such as gold, REITs, and bonds) have experienced more steady, positive performance.
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 is imperative for long-term success. Including a broad mixture of asset classes can help with achieving more consistent long-term results, smoothing the short-term market noise and making it easier to weather these common volatility storms.
Chart of the Week
Surprisingly, on the back of a weak jobs report, the Dow Jones Industrial Average Index closed higher by 4.8% last week, putting a stop its longest weekly losing streak since 2011. Additionally, last week’s return was the strongest weekly gain since the week ending Nov 30, 2018. Some of the strongest movers within the Index were companies like Apple, Nike, and Cisco. Over the last few weeks, given their international exposure, these companies were heavily targeted by traders as China-US trade tensions escalated. With the threat of tariffs on Mexico now averted, the more trade-sensitive Index could see additional gains if risks continue to taper.
*Chart source: Bloomberg
Broad equity markets finished the week positive as large-cap stocks fared better than small-cap stocks. S&P 500 sectors were also positive, with no clear trend between defensive and cyclical sectors.
So far in 2019, technology and real estate are the strongest performers while healthcare has been the worst performing sector.
Commodities were positive for the week as oil prices increased by 0.92% to $53.99/bl. This is the first increase in the last three weeks as trade tensions have been rattling markets. Although the commodity was on track for another weekly decrease, oil rebounded by week-end as Saudi Arabia, OPEC’s largest producer, agreed to extend output production cuts beyond June. This came as a relief to investors, who over the last few weeks, were concerned with high US crude inventory levels compared to international supply and demand. Additionally, appetite for the commodity was restored as investors grew skeptical of President Trump’s threat to impose tariffs on Mexico by Monday.
Gold prices increased by 2.71%, closing the week at $1,341.20/oz. This is the largest weekly increase since February 2018 and came on the back of investors increasing their hedges against cyclical equities by buying defensive sectors, treasuries and safe-haven assets like gold. As of week-end June 4th, money managers added over 38% worth of gold futures and options to their portfolios—the largest increase since 2007. Since gold is a safe-haven asset class, it tends to perform best when interest rates are low and volatility is high. Going into the remainder of 2019, gold has the potential to rise if current tensions persist.
The 10-year Treasury yield decreased from 2.14% to 2.09% resulting in positive performance for traditional US bond asset classes. During the week, treasuries experienced heightened demand as investors looked to continue their hedging efforts against additional market uncertainties. Additionally, both the private ADP employment report and the government jobs report released lower than expected numbers, contributing to fears of a labor market slow down. However, the labor market remains healthy with the unemployment rate at a historical 50-year low. Over the last week, the treasury market experienced higher than usual volatility as both domestic and international investors looked to hedge risks.
High-yield bonds were positive for the week as riskier asset classes rose and credit spreads tightened. 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 traditional US bonds lagging behind.
Lesson to be Learned
The market will not go up unless it goes up, nor will it go down unless it goes down, and it will stay the same unless it does either”
– George Goodman
Short-term market swings can, and will, frustrate even the most experienced investors. Nobody knows which ways markets are going to move in any given day or week. This is why it is important to ignore short-term market noise and focus on the longer-term trends. If you stick with a plan and maintain a properly diversified portfolio, you increase your chances for portfolio growth over 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 26.39, forecasting further economic growth and not warning of a recession at this time. The Bull/Bear indicator is currently 33.33% bullish – 66.67% bearish, meaning the indicator shows there is a slightly higher than average likelihood of stock market decreases in the near term (within the next 18 months).
The Week Ahead
It will be a relatively light week of economic reports, with retail sales and consumer sentiment being the most notable. Investors will also continue to closely monitor trade tensions between the US and other countries.