Geopolitical Uncertainties Continue to Drive Volatility
WEEKLY MARKET UPDATE – September 30, 2019
WEEKLY MARKET UPDATE – September 30, 2019
Markets moved lower for the week as geopolitical uncertainties appeared to control investor sentiment. Mixed signals from the US-China trade dispute have continued to drive volatility. After Chinese officials suddenly canceled plans to meet with US farmers following trade talks (a perceived negative signal), it was announced trade talks would resume on October 7. On Tuesday, President Trump accused China of intellectual property theft and stated he would “not accept a bad deal.” However, on Wednesday he remarked a trade deal with China could happen sooner than people think, helping re-calm fears.
Further volatility arose as House Speaker Nancy Pelosi endorsed an official impeachment inquiry of President Trump. This initially rattled markets as the economic impact of such an event is uncertain. However, investors shrugged off the news later in the week as an impeachment would require a supermajority vote in the Senate where Republicans maintain control, making it unlikely a conviction will actually happen. While impeachment news may dominate headlines in the near-term, past experiences show it will likely have little long-term impact on market direction.
Falling for the second consecutive week, the S&P 500 again failed to set a new all-time-high after moving within 1% of the level reached in July. A relatively strong economy and easy monetary policy have helped support markets so far in 2019, but geopolitical uncertainties and slowing global growth remain headwinds. Regardless of market conditions, it is important to stay committed to a plan and maintain a diversified portfolio consistent with your goals and risk tolerance. It can be tempting to make knee-jerk decisions based on news headlines, but sticking to a consistent strategy provides a better probability of success in the long-run.
Chart of the Week
Chinese focused ETFs took a hit this week as President Trump has floated the idea of delisting Chinese companies from US exchanges as well as blocking Chinese IPO listings. Such a move would mark a dramatic escalation in the U.S. – China trade war. It’s possible this idea is just a negotiating tactic, as representatives for both nations are scheduled to meet in October.
*Chart source: Bloomberg
Broad equity markets finished the week negative as trade tensions increased unexpectedly.
S&P sectors were mostly negative, with healthcare and energy bottoming out -3.01% and -2.61% respectively. Defensive sectors of consumer staples and utilities finished up 1.21% and 1.30% respectively. Technology continues to lead the S&P sectors YTD with 28.53% growth.
Commodities declined modestly this week as oil fell 3.75%. Data has remained relatively consistent in oil markets, with most measurements showing bullish indicators such as decreasing oil inventories. After being damaged in an attack, Saudi Arabia announced that its largest oil field would return to full capacity much sooner than originally forecasted, bringing oil prices down. Additionally, geopolitical and economic risks remain as the likelihood of conflict and slowing global growth weigh on markets.
Gold Prices decreased by modestly by 0.57% this week as analysts weigh whether gold is overbought. New sentiments that economic conditions do not warrant the high price have dragged on the precious metal. Commonly used as a hedge against economic uncertainty, gold is still up 14.77% on the year on growth concerns.
The 10-year Treasury yield fell from 1.72% to 1.68% while traditional bond indices rose. Yields have slid under renewed concerns surrounding economic growth. The 10-2 year yield curve continued a normal, non-inverted relationship. Treasury yields will continue to be a focus as analysts watch for signs of a recession.
High-yield bonds decreased very slightly over the week as investor optimism diminished and credit spreads loosened slightly. High-yield bonds are likely to remain attractive in the long term as the Fed has adopted a dovish stance and is expected to continue to lower rates, likely helping current bonds longer-term prospects.
Asset class indices are positive so far in 2019, with large-cap US stocks leading the way and bonds lagging.
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 a 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 29.82, 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
Investors will continue to monitor ongoing geopolitical risks, and the widely followed jobs report will be released on Friday.
More to come soon. Stay tuned.
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