Markets Rally Further, Setting New All Time Highs

WEEKLY MARKET UPDATE – December 23, 2019

U.S. markets finished up for the week, leading to new all-time highs in the S&P 500, Nasdaq, and Dow Jones indices. The utility sector took the lead, finishing ahead of real estate and communications to round out the strongest positive sectors. Markets continued to rally as reports bolstered the belief that a “phase one” trade deal would be signed in January. Both U.S. and Chinese leadership have praised the deal and have expressed willingness to sign it as soon as possible.

European indices finished strong for the week in spite of disappointing EU manufacturing data, with the rally likely propelled by improving global trade outlook and further clarity on Brexit. PM Boris Johnson’s Tory party has officially put a “no-deal” Brexit on the table if favorable terms with the EU are not agreed upon. Japanese markets declined negligibly as Japanese investors didn’t react as strongly to the positive trade developments.

Major indices rose this week as markets cheered trade progress between the U.S. and China. 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

Earnings growth intra sector has largely kept pace with the S&P500 performance as a whole. Fundamental metrics like earnings growth are critical when assessing the underlying strength of the market. Strong earnings support a more bullish perspective.

Market Update

Equities

Broad equity markets finished the week up, setting new all-time highs, as investors were encouraged by the positive press surrounding the “phase one” trade deal.

S&P sectors were exclusively positive this week as not a single sector returned a negative price performance. Utilities and real estate led the positive sectors with 2.71% and 2.66% returns respectively. Technology continues to lead the S&P sectors YTD with 46.74% growth.

Commodities

Commodities rose this week, driven by gains in oil and natural gas. Oil markets have been highly volatile, with investors focusing on geopolitical tension and global demand concerns. If the “phase one” trade deal is signed, investors will likely turn more bullish on commodities, as global trade is critical support for energy and metal prices.

Gold declined negligibly this week, as investors continue to hold a hedge against macroeconomic risks. The U.S. – China trade deal will likely be the determining factor in longer-term gold prices as a final signing of the agreement is awaited. In the meantime, investors and speculators are likely to play it safe by holding onto gold positions.

Bonds

The 10-year Treasury yields rose from 1.82% to 1.92% while traditional bond indices fell. Treasury yields rose as markets were encouraged by the talk surrounding the U.S. – China trade deal. The 10-2 year yield spreads widened, likely indicating investor faith in the trade deal. 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

“If you have more than 120 or 130 I.Q. points, you can afford to give the rest away. You don’t need extraordinary intelligence to succeed as an investor.”

-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 likely be a slow week as western markets wind down for the Christmas holiday. Trading volumes will likely decline to lead to decreased volatility.

More to come soon. Stay tuned.