Global Indices Rally As U.S. And China Agree To Phase One Trade Deal

WEEKLY MARKET UPDATE – December 16, 2019

U.S. markets finished up for the week, leading to fresh all-time highs in the S&P 500. The technology sector took the lead, finishing ahead of consumer discretionary and financials to round out the strongest positive sectors. Markets breathed a cautious sigh of relief as the first news of an agreed-upon “phase one” trade deal between the U.S. and China disseminated into the media on Friday, leading investors to hope for an end to the costly trade conflict. Further supporting markets, the Fed removed the mention of “uncertainties” in its most recent release and signaled likely unchanged prime rates through the completion of 2020.

European indices finished strong for the week, propelled by improving global trade outlook and the beginning of the end of Brexit. On Thursday, the UK elected PM Boris Johnson’s Tory party took Parliament majority in a landslide decision, all but assuring the UK will be officially departing the EU. The PM has vowed to pass his withdrawal agreement before year-end and sign a new trade deal with the EU by the end of 2020. Japanese markets cheered the positive trade developments, and even made progress in its own trade dispute with neighbor South Korea, leading the Nikkei to close at the highest levels in over a year.

Major indices rose this week as markets cheered positive macroeconomic developments. Markets are poised to have a banner year. 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

Speculators are increasingly betting on an increase in crude oil prices. Recent trade developments, as well as expected OPEC cuts, are likely fueling the positions. Crude oil hasn’t sustained a price above $60 per barrel since 2018.

Market Update

Equities

Broad equity markets finished the week up, setting new all-time highs, as investors cheered macroeconomic economic developments.

S&P sectors were mixed but skewed highly positive, with only real estate and communications returning negative results at -2.56% and -0.67% returns respectively. Technology and consumer discretionary led the positive sectors with 1.96% and 1.07% returns respectively. Technology continues to lead the S&P sectors YTD with 43.98% growth.

Commodities

Commodities climbed this week, driven by gains in oil and metals. Oil markets have been highly volatile, with investors focusing on geopolitical tension and global demand concerns. Most recently, the oil price outlook is appearing to look more bullish. Since Saudi Arabia threatened OPEC members with retaliatory oil output increases, oil prices have ticked up, anticipating a reduction in output from the oil cartel. Additionally, the U.S. – China trade deal will help support oil prices as global demand is likely to get support from increased trade activity.

Gold prices rose slightly this week, rising 1.10% in spite of the U.S. – China trade agreement. The U.S. – China trade deal will likely be the determining factor in longer-term gold prices as further details concerning the agreement are awaited. In the meantime, investors and speculators are likely to play it safe by holding onto gold positions.

Bonds

The 10-year Treasury yields fell from 1.84% to 1.82 while traditional bond indices rose. Treasury prices likely fell slightly as markets awaited more clarity on the terms of the U.S. – China trade deal. The 10-2 year yield spreads tightened slightly, likely indicating caution ahead of further trade deal information. Treasury yields will continue to be a focus as analysts watch for signs of changing market conditions.

High-yield bonds yields fell over the week, indicating a possible thaw in investor attitudes towards riskier debt, driving spreads to tighten. High-yield bonds are likely to remain volatile in the short to intermediate-term as the Fed has taken a neutral monetary stance and investors weigh risk factors, likely driving increased volatility.

Lesson to be Learned

“We don’t have to be smarter than the rest. We have to be more disciplined than the rest.”

-Warren Buffet

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 26.26, 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

It will be an interesting week as the markets attempt to digest the recent economic developments. The UK election concluded in a landslide, the Fed is holding steady, and the touted U.S. – China phase one trade deal will be scrutinized.

More to come soon. Stay tuned.