Markets Recover on Trade Optimism

WEEKLY MARKET UPDATE – December 2, 2019

U.S. equity markets closed up for the week, with all major large-cap indices finishing in positive territory. The consumer discretionary sector led the pack, finishing ahead of technology and real estate at the top of the positive sectors. This week saw a market rebound on the backs of an unexpected lift in retail stocks as well as the Chinese announcement that they would be strengthening intellectual property laws and enforcement. The trade war between the U.S. and China is looking like it may take a turn for the better, as a “phase one” deal seems to be more likely given the most recent Chinese “goodwill” gesture.

European indices recovered over the week, finishing up across the board. European markets have shown a high degree of sensitivity to U.S. markets, typically following the prevailing U.S. market sentiments. Improvement in the trade dispute between the U.S. and China has had a large impact on developed international markets, especially Europe and Japan. The Nikkei index finished the week up well, as Japan is especially sensitive to global trade disruptions.

Major indices rebounded significantly this week, and major market indices set new all-time highs. 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

U.S. retailers rebounded last week, erasing its monthly losses to post a respectable 24% gain YTD. Optimism surrounding retail bodes well for the holiday shopping season, as many merchants’ income statements depend heavily on holiday sales.

Market Update

Equities

Broad equity markets finished the week up, returning to fresh all-time highs, as investors turned optimistic on trade outlooks.

S&P sectors were mixed but skewed heavily positive, with energy and utilities bottoming out -1.55% and -0.03% respectively. Consumer discretionary and technology led the positive sectors with 1.76% and 1.73% respectively. Technology continues to lead the S&P sectors YTD with 41.78% growth.

Commodities

Commodities declined this week, driven by precipitous declines in oil and natural gas. Oil markets have been highly volatile recently, with investors focusing on geopolitical tension and global demand concerns. Recent oil inventory numbers missed expectations and added inventory, continuing recent trends of repeated expectations misses. If U.S. – China trade optimism continues, this will likely add upward pressure on oil prices, but short term fears are mostly outweighing longer term likely trade prospects.

Gold prices improved slightly this week, climbing 0.15% in spite of optimism surrounding the 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 rose from 1.77% to 1.78% while traditional bond indices split; domestic bonds rose while international bonds declined. Treasury prices fell on subsiding fears concerning global macroeconomic outlook, spurred by U.S. – China progress. The 10-2 year yield spreads widened, reversing the previous two-week trend. Treasury yields will continue to be a focus as analysts watch for signs of changing market conditions.

High-yield bonds rose over the week, following traditional bonds and treasury movements as credit tightened. High-yield bond yields are likely to remain elevated in the long term as the Fed taken a neutral monetary stance and investors pursue lower-risk assets, likely driving yields higher over time.

Lesson to be Learned

“Investors should purchase stocks like they purchase groceries, not like they purchase perfume.”

-Ben Graham

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

Heading into the last month of the year, investors are hoping for a smoother ride than December 2018. Labor market data will be released on Friday.

More to come soon.  Stay tuned.