Markets rallied this week as all major equity indices returned strong gains. Utilities led the S&P sectors, finishing ahead of Technology and Materials to round out the strongest sectors. Markets cheered as U.S. economic data impressed and the long awaited U.S. – China “phase one” trade deal was signed.
European indices returned solid gains this week, with all major indices returning positive results. Japanese equities returned positive performance as well, returning a second consecutive week of price improvements. World indices all reacted favorably to economic and geopolitical developments during the week.
Markets performed very well this week, with all major indices bringing in positive returns. Though markets returned positive performance, the recent volatility 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
Continuing improvements in the S&P 500 relative to the Russell 2000 can largely be explained by wider than normal valuations. Comparatively, the S&P index is cheaper than its historical P/E ratio discount to the Russell index.
Broad equity markets finished the week positive, with major large cap indices underperforming small cap. In the first month of 2020, markets have gotten a lot of support, both from trade developments and holiday sales data.
S&P sectors were mostly positive this week, with only energy declining. Utilities and technology led the positive sectors returning 3.76% and 2.95% respectively. Energy declined -1.12%. Technology has the lead so far YTD, returning 5.87% in 2020.
Commodities declined this week, driven by losses in oil and natural gas. Oil markets have been highly volatile, with investors focusing on geopolitical tension and global demand concerns. The recent tensions between the U.S. and Iran have receded significantly, leading to fewer fears that an escalation could lead to supply disruptions.
Gold climbed slightly, finishing over the $1500/oz mark for the fourth consecutive week. Focus for gold has shifted to global growth concerns, as geopolitical tensions seem to be fading from investor focus.
The 10-year Treasury yields rose from 1.82%to 1.822 while traditional bond indices rose. Treasury yields rose as geopolitical tensions declined and economic data improved, encouraging investors back towards risky assets. The 10-2 year yield spreads loosened. Treasury yields will continue to be a focus as analysts watch for signs of changing market conditions.
High-yield bond yields declined over the week, causing 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.
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 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 the scale of 1 to 100. For the US Equity Bull/Bear indicator, we want it to read 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 24.04, 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 could be a slow week as the economic calendar is light on major releases. U.S. markets will likely still be digesting the projected impact of the U.S. – China trade deal, which could move prices unpredictably.
More to come soon. Stay tuned.