Constructive Trade Talks Help S&P 500 Post Best Start to Year Since 1998

Trade Talks

Markets rebounded from yield curve fears as constructive US-China trade talks boosted global stocks.
Progress appears to have been made in the latest round of trade talks as US negotiators arrived in Beijing on Thursday to continue discussions. Following the meetings, reports stated there was positive progress in all areas of discussion, with China making proposals on touchy issues such as forced technology transfers. With the upbeat trade talk news, investor sentiment shifted to a more “risk-on” stance, resulting in an un-inversion of the yield curve on Friday as the 10-year treasury yield jumped slightly above the 3-month yield.

The positive week helped the S&P 500 finish its strongest quarter since Q3 2009. Furthermore, it was the strongest first quarter to start a year for the Index since 1998. While the quarter benefited from an oversold bounce back after the 9.18% sell-off in December, data illustrates the potential for continued gains in 2019. The S&P 500 has risen more than 10% in the first quarter of a year just four times since 1990. In all of those instances, the Index traded higher for the remainder of the year, averaging an additional gain of 10.3% for the next nine months.

Stocks Update

Stocks have rallied significantly since the late December lows, with the S&P 500 gaining over 20% since Christmas – bringing it within 4% of a new all-time-high. Following such a strong rally to start the year, the potential for continued gains seems to be riding 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, Brexit uncertainty, and yield curve fears. 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 gained just over 13 percent in Q1, making it the best quarter since 2009 and best start to the year since 1998. Historically, when first quarter performance is overall positive a bull market ensues throughout the rest of the year. Since 1950, the S&P 500 has returned more than 10% in the first quarter on 10 separate occasions. In nine of these 10 instances, the Index went on the post double-digit gains for the year (with the exception of 1987, which included the Black Monday market crash).

*Chart source: Bloomberg

Market Update

Equities

Broad equity markets finished the week positive as small-cap stocks fared better than large-cap stocks. S&P 500 sectors were mostly positive, with cyclical sectors outperforming defensive sectors. So far in 2019, technology and real estate stocks are the strongest performers while healthcare has been the worst performing sector.

Commodities

Commodities were positive as oil prices increased by 1.86% to $60.14/bl. This marks the fourth consecutive weekly increase for the commodity since falling to the $55/bl level a few weeks ago, and the first time breaching the $60 level this year. Oil climbed as Chinese factory gauges appeared positive, pointing to a possible rebound in their manufacturing sector and alleviating some global growth concerns. Additionally, supply cuts from OPEC have been providing additional price support. Year-to-date, oil prices are up over 32%.

Gold prices decreased by 1.47%, closing the week at $1,293.00/oz. This is the metals first decline in four sessions and the second time dropping below the $1,300/oz this month. Since gold is a US dollar-denominated safe-haven asset class, it tends to perform best when interest rates are low, volatility is high, and supply and demand forces are stable. If current geopolitical tensions were to persist and economic data were to deteriorate, the demand for gold as a safe haven asset could increase.

Bonds

The 10-year Treasury yield decreased from 2.44% to 2.41%, resulting in positive performance for traditional US bond asset classes. This is the lowest level for yields since December 2017. The bond market is still recovering from the inversion of the 3-month and 10-year yield curve recently. That, coupled with poor global economic data, has led some investors to increase safe-haven asset exposure.

High-yield bonds were slightly 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 commodities leading the way and traditional US bonds lagging behind.

Lesson to be Learned

“You can find good reasons to scuttle your equities in every morning paper and on every broadcast of the nightly news”

– Peter Lynch
With the fast pace of technology growth and news delivery, it is easy to find reasons to “tinker” with your investments every day. However, reacting to “hot headlines” can be detrimental to your portfolio. To be a successful investor, it is imperative to be resilient and patient, removing emotions from the equation and sticking to the plan you have laid out. By sticking to an emotion-free, disciplined investment strategy, you can avoid chasing returns and increase 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 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).