Markets Hold Their Breath as Investors Anticipate Trade War Developments

WEEKLY MARKET UPDATE – November 19, 2019

U.S. equity markets closed the week mostly up, with major large-cap indices all finishing in positive territory. Healthcare took the lead, beating out real estate and utilities. Markets spent the week grappling with conflicting reports on the status of the U.S. – China “Phase One” trade deal. Some sources claim a deal is near certain, while others doubt an agreement can be reached. President Trump was coy during his speech on Tuesday, indicating that a deal was still in the works.

Across the pond, European indices finished mixed as investors try to weigh a variety of factors. Recently, violent protests concerning independence have jarred the Catalan region of Spain, contributing to sharp declines in Spanish equities. French equities have performed well, however, largely canceling out the Spanish decline. In Japan, equities lost some steam after last week’s impressive gains. Preliminary GDP numbers missed analyst expectations, leading to a sell-off of assets.

In addition to its now six-week winning streak, the S&P 500 and Dow Jones set new all-time-highs, beating the records set just last week. While this is good news, the volatility in recent weeks and months still serves as a great reminder of why it is so important to remain committed to a long-term plan and maintain a well-diversified portfolio. When stocks were struggling to gain traction last month, other asset classes such as gold, REITs, and US Treasury bonds proved to be 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

The gap between analyst price expectations of energy stocks and the Stoxx 600 index remains wider than in most recent years. Held down by slumping earnings, energy stocks have not been able to narrow the gap between actual prices and price targets. While most analysts still find the sector attractive due to depressed prices, many investors have been reluctant to buy into the sector.

*Chart source: Bloomberg

Market Update

Equities

Broad equity markets finished the week mostly up, setting new all-time highs, as investors remained cautiously upbeat on improved trade outlook.

For the fifth consecutive week, S&P sectors were mixed but skewed heavily positive, with energy and financials bottoming out -1.28% and -0.26% respectively. Healthcare and real estate led the positive sectors with 2.42% and 1.93% respectively. Technology continues to lead the S&P sectors YTD with 40.53% growth.

Commodities

Commodities were flat this week, with a sharp downturn in natural gas offsetting gains in oil and gold. Oil markets have been highly volatile recently, with investors focusing on geopolitical tension and global demand concerns. Recent oil inventory numbers continue to miss expectations by wide margins. U.S. – China trade optimism will likely add upward pressure on oil prices, but short term fears are mostly outweighing longer-term trade prospects.

Gold prices recovered slightly this week, rising 0.38% on conflicting news of progress in U.S. – China negotiations. The market is continuing to wrestle with macroeconomic factors to determine the appropriate value. The U.S. – China trade deal will likely be the determining factor in longer-term gold prices.

Bonds

The 10-year Treasury yields fell from 1.94% to 1.83% while traditional bond indices rose. Treasury yields fell on fears concerning the global macroeconomic outlook. The 10-2 year yield spreads tightened slightly, falling from near three-month highs. Treasury yields will continue to be a focus as analysts watch for signs of a recession.

High-yield bonds dropped slightly over the week, defying traditional bonds and treasury movements as credit loosened negligibly. High-yield bonds are likely to remain attractive in the long term as the Fed has taken a neutral monetary stance, possibly having a mixed impact on current bonds’ longer-term prospects.

Lesson to be Learned

“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”

– Robert Kiyosaki

It can be easy to become distracted from our long-term goals and chase returns when markets are volatile and uncertain. It is because of the allure of these distractions that having a plan and remaining disciplined is mission-critical for long term success. Focusing on the long-run can help minimize the negative impact emotions can have on your portfolio and increase your chances for success over time.

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 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 the strongest and least volatile.

The Recession Probability Index (RPI) has a current reading of 27.68, 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

Many retailers will be reporting quarterly results, which could provide insight to the health of consumers leading up to the holiday season. Investors will also continue following any new developments in the U.S. – China trade negotiations.

More to come soon.  Stay tuned.