Slowing Global Growth Remains Concern

Stocks posted the worst week of 2019 as slowing global growth and a disappointing jobs report resulted in modest losses. Major US indices experienced declines during every trading day throughout the week as the early-year rally stalled. Signs of a global economic slowdown weighed on sentiment during the week. Contributing to the downward pressure, the European Central Bank cut its forecast for eurozone growth in 2019 from 1.7% to 1.1% and announced it would keep interest rates unchanged through at least the end of the year. This was a surprising move which seemed to highlight the negative impact various geopolitical concerns have been having on growth overseas (such as Brexit and trade tensions).

The week was capped off with a disappointing jobs report on Friday. Payrolls advanced by only 20,000 jobs compared to a consensus prediction of 180,000. This lead many economists to believe we are near full employment, meaning businesses cannot easily find new workers to hire and wage growth would need to accelerate to attract more workers into the labor force. Supporting this theory, average hourly earnings rose 3.4% compared to a year ago – the strongest growth rate of the current business cycle which began in 2009.

Negative Week

Despite the negative week, stocks have rallied significantly since the late December lows, with the S&P 500 gaining over 16.7% since Christmas – bringing it within 6.5% of a new all-time-high. Following such a strong rally to start the year, the potential for continued gains seems to be hinging on a US-China trade deal. Trade tensions have been a constant source of volatility over the past year, but optimistic reports have boosted investor sentiment in recent months.

However, there are also still reasons to remain cautious, such as softening global growth. With conflicting signals and data, it is reasonable to expect volatility to persist as markets remain sensitive to major headlines. This 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.

Table of Contents

Chart of the Week

The S&P 500 dropped in all five trading days last week bringing the US stock benchmark to only its second weekly decline year-to-date and its worst week since the December rout. Further analysis shows out of the last 52 trading sessions, the Index has dropped 20 times. Of those 20 times, only two were 5% or greater and only six were greater than last weeks’ drop. However, with such a strong start to the year, a short-term pullback is not completely unpredicted. As we continue into the year, investors will be cautiously watching for additional signs of slowing global growth while monitoring risks to adequately adjust portfolio strategies.

*Chart source: Bloomberg

Market Update

Equities

Broad equity markets finished the week negative as small-cap stocks experienced the largest losses. S&P 500 sectors were mostly negative, with defensive sectors outperforming cyclical sectors. So far in 2019 industrial and technology stocks are the strongest performers while healthcare has been the worst performing sector.

Commodities

Commodities were positive as oil prices increased by 0.48% to $56.07/bl. Despite the increase, oil dropped at week-end as a weak US jobs report added to global growth concerns. Since oil is heavily dependent on the global economy, prospects of slowing demand coupled with high supply levels from the world’s main exporters can cause significant price movements. Additionally, the European Central Bank (ECB) introduced a new stimulus program last week in which they would provide low-interest long term loans to banks. This comes as the ECB warns there is “continued weakness” in the European economy. Preliminary data shows US oil rigs pumping at a record 12 million barrels per day (bpd). This comes at a time where OPEC and its allies have committed to reducing supply by 1.2 million bpd in the first six months of 2019. Year-to-date, oil prices are up over 23%.

Gold prices increased by a mild 0.01%, closing the week at $1,299.30/oz. The metal’s price remained relatively unchanged as investors focused on other areas of the market for additional returns. Although the metal has rallied close to 5% year-to-date, analysts warn the commodities rally might be close to over as demand looks “relatively soft”. However, since gold is a safe haven asset, it could continue to rise if volatility returns to the markets and investors demand safe haven asset classes.

Bonds

The 10-year Treasury yield decreased from 2.76% to 2.62%, resulting in positive performance for traditional US bond asset classes. The 10-year yield decreased as investors purchased safe haven Treasuries in the wake of growing concerns of a weakening global economy. If investors continue to flock into longer term US Treasuries, the spread between the 10 and 2-year bond will become more important to watch as a “negative spread” typically signals a recession in 1-2 years. Currently, the spread sits at 0.16%, down from 0.20% last week.

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 small-cap stocks leading the way and traditional US bonds lagging behind.

Lesson to be Learned

“Spend each day trying to be a little wiser than you were when you woke up.”

– Charlie Munger
Financial markets are constantly changing and evolving. As investors, we need to remain agile and able to shift with broad market trends. However, many people have difficulty parting with a losing investment because “they just know it is going to turn around soon.” Eliminating emotions from the investment process can help with this. By taking emotions out of the equation, investors can make decisions based on rational information rather than their feelings, increasing the odds of success in the long-run.

Indicators

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 the strongest and least volatile.

The Recession Probability Index (RPI) has a current reading of 33.40, 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).