Weekly Market Update February 25, 2019

The Dow Jones Industrial Average posted its ninth consecutive week of gains, its longest winning streak since May 1995.

Trade and Fed-related headlines continued to drive markets during the holiday-shortened week, pushing global stock indices higher. According to reports, Chinese officials extended their visit to Washington DC by two days. Treasury Secretary Steven Mnuchin stated the two sides reached a final agreement on a currency provision, though no specific details were released. With trade talks steadily progressing in recent weeks, President Trump said he expects to meet soon with Chinese President Xi Jinping to work out the final points of a trade deal (the meeting could take place as early as late-March).

While trade talks remained relatively positive, the release of the Federal Reserve Board’s minutes from its most recent meeting also boosted stocks. The minutes showed Fed officials appeared to agree on the need to stop reducing the size of its balance sheet, a further shift away from the monetary tightening experienced in recent years. However, the Fed left some wiggle room to re-evaluate its approach if the economy remains in good shape and inflation picks up. For now, the committee is taking a “patient” approach rather than forecasting additional rate hikes in 2019.

Stocks have rallied significantly since the late December lows, with the S&P 500 gaining over 18% since Christmas – less than 5% off its all-time-high. However, there are still reasons to remain cautious, such as softening global growth and sluggish retail sales data. 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.

 

Chart of the week

Since hitting multi-year lows in December, the S&P 500 has rallied over 18% and is around 100 points away from making new highs. However, before making its way back to the top, a critical resistance level at the 2,800 level must be tested. During the Q4 rout, the 2,800 level capped additional gains on three separate occasions. In the upcoming weeks, investors will be cautiously watching how the trade situation with China develops as well as technical levels to gauge the strength of US markets going forward. A rally of approximately 5% is needed to place the S&P back at an all-time high.

*Chart source: Bloomberg

 

Market Update

Equities

Broad equity markets finished the week positive as small-cap US stocks experienced the largest gains. S&P 500 sectors were positive, with cyclical sectors outperforming defensive sectors.

So far in 2019 industrial and energy stocks are the strongest performers while healthcare has been the worst performing sector.

Commodities

Commodities were positive as oil prices increased by 3% to $57.26/bl. Multiple factors have helped support the growth of oil prices in the last few sessions. First, hopes that trade tensions between the U.S. and China are coming to an end have provided a more positive outlook for higher demand. Second, OPEC continues to adhere to supply cuts helping offset high production levels coming from the US. Currently, analysts estimate US production to hit 13 million barrels per day (bpd) by year end, with an average of 12.5 million bpd. If demand remains healthy and supply levels contained, analysts expect the average price of oil to be $60-65 between 2019 and 2020.

Gold prices increased by 0.81%, closing the week at $1,332.80/oz. The metal rallied throughout the week before giving back some gains as the Fed minutes. By giving themselves some room to re-adjust the policy later in the year, members of the committee did not appear as dovish as expected, setting the market to believe there could be another rate hike this year. Since the metal is US dollar-denominated, higher interest rates make it more expensive to foreign buyers. Additionally, the metal is approaching the resistance level of $1,350/oz which has acted as a price ceiling since mid-2013. Upcoming weeks should shed some light on if the metal is able to continue to rally beyond its key resistance levels.

Bonds

The 10-year Treasury yield decreased from 2.66% to 2.65%, resulting in positive performance for traditional US bond asset classes. As the 10-year yield decreased, the 2-year yield also decreased, slightly widening the spread between them to 15 basis points. Currently, the market expects one more interest rate hike for 2019. With relatively steady rates ahead of us, treasury prices might be more influenced with market levels in 2019. Investors are currently interested in earnings surprises versus estimates as a fear of an earnings recession (where earnings growth is negative on a year-over-year basis for two consecutive quarters) has been circulating wall street.

High-yield bonds were positive for the week as riskier asset classes rose and credit spreads tightened. As long as 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 strongest and least volatile.

The Recession Probability Index (RPI) has a current reading of 29.56, forecasting further economic growth and not warning of a recession at this time. The Bull/Bear indicator is currently 66.67% bearish – 33.33% bullish, 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

Investors will be keeping an eye on progress toward a US – China trade deal as the March deadline approaches.