Week 50 Sitrep

The U.S. stock market dealt with a familiar problem last week – negative trade headlines. The week opened with news that the U.S. would be willing to wait for a trade deal with China until after U.S. elections in 2020. The timing of the announcement was purposeful since the U.S. had previously announced tariffs that would go into effect on December 15th. The week turned around quickly, however, when Chinese officials reaffirmed that a trade deal is possible. Additionally, better-than-expected economic news, including unemployment claims and payroll numbers, drove markets back near all-time highs on Friday.


Source: J.P. Morgan Asset Management, Weekly Market Recap, 12/9/19

 

Market sectors saw expected results last week when markets get choppy. The value stocks generally hold up better, while sectors like energy, consumer staples and health care tend to outperform when the markets go down. Both occurred last week when stocks turned down and volatility went higher.1 Neither of those trends have held up for long in 2019 given the strong results for the S&P 500 Index. The growth companies continue to lead the market with returns over 30% for large and medium-sized companies.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 12/9/19

 

The U.S. market continues to consistently show an uptrend in place since the beginning of October. Prior to last Monday, the S&P 500 Index had traded with very low volatility since October 11th. In fact, the market enjoyed 34 trading days without posting a loss greater than 1% in a single day. That period was the fourth longest in the current bull market, all of which have occurred since the 2016 elections. According to Bespoke Investment Group, markets generally experience weaker returns in the 12 months following a lengthy period of lower volatility.2

Source; Bespoke Investment Group, Chart of the Day, December 3, 2019

 

With stock indexes trading near all-time highs, we have heard some news organizations expressing sentiments that we must be nearing a turning point and stocks will likely fall or enter a bear market soon. We do not, however, see strong evidence for a change in momentum at this time. Bespoke often notes that an important confirmation of market strength is the cumulative advance/decline (A/D) line, a measure that compares the total number of stocks rising in price versus those declining in price. An upward sloping line is a positive sign of more stocks rising than falling. Comparing the cumulative A/D line to recent index returns is a means of seeing if a trend is intact. It is generally a sign of trouble if the two lines diverge from each other.3 We feel that the cumulative A/D line is confirming the recent move up in stock prices.

Source; Bespoke Investment Group, The Bespoke Report, December 6, 2019

 

We continue to notice that U.S. stocks are outperforming stocks from international markets. This trend has been in place for the last few years but has recently continued despite attempts by international stocks to make a comeback. There are many potential reasons that U.S. stocks have better returns, including the stronger dollar relative to foreign currencies and stronger economic growth in the U.S.4 We continue to monitor global markets for changes in trend but have not seen strong evidence to be optimistic for international markets recently.

Source; Bespoke Investment Group, The Bespoke Report, December 6, 2019

 

Our supply/demand indicators continue to show increasing demand for U.S. stocks. By way of reminder, we use these measures to determine the overall direction of trends for U.S. stocks, international stocks, bonds and a few smaller sectors. The long-term indicator is built using multiple metrics to gauge the overall demand for stocks while the “indicator value” helps us to visualize daily changes in direction and strength. The current indicator for U.S. equities at 68.15 is up from 44 in December 2018. We confirm the demand trends by looking at multiple time frames as well as looking at individual asset classes and sectors within the U.S. market. If one of the indicators were to change to a negative position, our investment committee would commence an evaluation of portfolio risk to determine if a reduction in risk were warranted.

Interest rates moved nominally higher last week with concern over the trade deal between the U.S. and China. The increase in rates was subdued as economic news was released showing the lowest unemployment rate in the U.S. for more than 50 years.5 The U.S. 10-year Treasury remains roughly 1% lower than one year ago. Despite the relatively low rates currently, many foreign investors continue to find the U.S. bond market appealing as comparable rates in Europe and Japan are still negative. Notably, 30-year fixed mortgages remain below 4% and should continue to provide incentive for home purchase and refinance activity.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 12/9/19

 

The current bull market remains intact and is quite impressive by length of cycle as well as overall percentage return. This bull market is the second longest in history following the cycle that went from 1987 until 2000.6 We often wonder why many investors are less confident in this current market cycle. There are many reports showing investor optimism remains subdued and confidence levels are very low. Some analysts point to the barrage of negative headlines we face daily or a dysfunctional government that always wants to point fingers at each other. We also believe that the current generation of investors remain skeptical due to the experience of two nasty market declines greater than 50% over the last 20 years. Regardless, the markets continue to march along generating very impressive returns for those investors with a well-planned risk management strategy.

Source; Bespoke Investment Group, The Bespoke Report 2020, December 6, 2019

 

There are a few things to monitor closely in the markets this week. The first is the last meeting of the year for the Federal Reserve Board. The meeting is scheduled to close on Wednesday and Fed chairman Powell is expected to announce the results after lunch. Most analysts anticipate no change in interest rate policy from the Fed but there is always an opportunity for comments that could affect markets.

 

We also expect to hear news about the December 15th deadline for new tariffs to go into effect on Chinese goods. The rumors have been active about an extension for that deadline as the market anticipates a Phase One trade deal between the two countries. This will be a headline to watch as the market is expecting good news on trade. Separately, it appears that the U.S. congress and the President have struck an agreement on the trade deal with Mexico and Canada.

 

If you’d like to schedule a time to discuss your portfolio or the markets in detail, please feel free to call our office at (281) 616-5935 or send an e-mail to cameron.malott@engravewealth.com. We welcome the opportunity to sit down with you and learn more about your situation so we can help you optimize your portfolio to meet your financial goals for years to come.

Engrave Wealth Partners Investment Committee

Bill Day, CFP®, CIMA

Taylor Parker, CFP®

Greg Parker


Footnotes:

1. J.P. Morgan Asset Management, Weekly Market Recap, 12/9/19
2. Bespoke Investment Group, The Bespoke Report, 12/6/19
3. Bespoke Investment Group, The Bespoke Report, 12/6/19
4. Bespoke Investment Group, The Bespoke Report, 12/6/19
5. Bespoke Investment Group, The Bespoke Report, 12/6/19
6. Bespoke Investment Group, The Bespoke Report, 12/6/19

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