Markets Continue Slide as Trade Tensions Escalate Again

WEEKLY MARKET UPDATE – August 26, 2019

Markets continued to slide as trade tensions between the US and China escalated again. Stocks were on track to snap the weekly losing streak until Friday morning, when fresh tariff news sent indices sharply lower. Early Friday, China announced new tariffs on $75 billion of US goods – effective September 1 and December 15. This included a 25% tariff on US cars. Immediately following the news, markets tumbled and closed 2-3% lower for the day. President Trump responded by announcing the US would hike tariff rates on $550 billion of Chinese goods, and asked US companies to find an alternative to operating in China.

The late-week trade tensions overshadowed Fed Chairman Jerome Powell’s pledge to keep the economic expansion going. In his speech at the annual central bank conference in Jackson Hole, Wyoming, Powell hinted another rate cut is likely later this year. Powell acknowledged the US economic outlook remains relatively favorable but cited ongoing trade tensions, low inflation, and a lack of strength in overseas economies as areas that continue to pose a risk. With the next Fed meeting in mid-September, the implied probability for a rate cut now sits at 100% according to the CME Group’s FedWatch tool.

Recent weeks have been a great example of why it is so important to remain committed to a long-term plan and maintain a well-diversified portfolio. While stocks trended lower, other asset classes continued to perform well as gold, REITs, and US Treasury bonds were more stable.

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

All three major US indices posted their fourth consecutive week of negative returns. This matches what was experienced in May when equities fell during the month after securing all-time highs. Additionally, investors continued to flee from equities as the 2 and 10-year yield curve remained inverted – an event that typically precedes recessions. However, since market returns are normally distributed over the long run, it is not uncommon to see prices rebound after several weeks of negative returns.

*Chart source: Bloomberg

Market Update

Equities

Broad equity markets finished the week negative as international stocks fared better than domestic stocks.

S&P 500 sectors were mostly negative, with defensive sectors outperforming cyclical sectors. So far in 2019, technology and real estate stocks are the strongest performers while energy has been the worst-performing sector.

Commodities

Commodities were negative as oil prices decreased by 1.28% to $54.17/bl.  During the week, oil experienced heightened price pressure as global growth concerns rippled through markets. Additionally, by week-end prices fell further as the trade conflict between the US and China deepened. President Trump announced retaliatory tariffs on the additional 5% of tariffs the Chinese Commerce Ministry imposed on products originating in the United States. These items include agricultural products such as soybeans, aircraft, and oil. Year-to-date, oil prices are up 21% but remain 16% below the highs experienced in April.

Gold prices rose by 0.92%, closing the week at $1537.60/oz. This is the fourth consecutive week of increases and the second consecutive week of maintaining a price above $1,500/oz. Gold appeared ready to close down for the week, until Friday morning when a spike in volatility triggered a $30.00 rally. The move was a result of renewed fears surrounding the tensions in the China-US trade dispute. Gold continues to be the hedge of choice against political and economic risks, propelling the metal to heights not seen since 2013.

Bonds

The 10-year Treasury yield fell from 1.55% to 1.52%, resulting in positive performance for traditional US bond asset classes. Yields hit the lowest level since August 2016 as trade tensions elevated. Additionally, during the week, the 10-year to 2-year yield curve inverted for the second time. This happened as investors rushed into longer-term treasuries on the back of increasing geopolitical risks. Investors further hedged against falling equities by purchasing longer-term treasuries. Although historically the inversion of the 10-2 year yield curve has preceded recessions, it has not necessarily caused them.

High-yield bonds were positive for the week as 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 commodities lagging.

Lesson to be Learned

The most important quality for an investor is temperament, not intellect.”

– Warren Buffett

When markets are volatile, it can be easy to make knee-jerk emotional decisions. However, this is precisely when it is important to maintain an even-keeled temperament. As long-term investors, we need to remain disciplined, ignore daily market noise, and maintain a well thought out plan. 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.

FormulaFolios Indicators

FormulaFolios 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 at 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).

The Week Ahead

Consumer confidence data will be released on Friday. Investors will also be watching to see how markets react to the recent rise in trade tensions.

More to come soon.  Stay tuned.