After three consecutive weeks of gains, the U.S. stock market ended the week lower by about half a percent. The majority of the losses came from small-cap and value stocks. Volatility has come down quite a bit compared to last month, where 50 percent of the days closed higher or lower by at least one percent.
International stocks saw similar weekly declines, with emerging market stocks doing slightly worse than developed country stocks.
After reaching nearly 1.9 percent a couple weeks ago, the yield on the U.S. 10-Year Treasury Note fell to around 1.7 percent last week, boosting long-term Treasury returns by over three percent. Investment-grade bonds, TIPS, and U.S.-denominated emerging market bonds also realized gains of over one percent.
Despite the continued strength in the U.S. dollar, commodities posted positive gains for the week, with both gold and grain prices rising. The majority of the rise, however, came from the more than six percent gain in oil prices.
Price Movement: Neutral – So much information floods the financial world that one can easily get lost in the day-to-day commotion. For that reason, we separate data into three major buckets. When combined, these buckets give us a clearer view of the big picture, without all the noise.
The first (and perhaps most important) bucket is Price Movement, which is just what it sounds like: looking at what market prices are doing. There are several ways to measure this, but they all come down to getting on the right side of a trending market. By most measures, the stock market is in an environment that favors an upward trend. A simple model that measures the direction of prices in various sectors of the U.S. stock market is currently reading 100 percent positive. In other words, of the 12 sectors in the model–which includes indices like the well-known Dow Jones Industrial Average and the Nasdaq Composite–all 12 of them are in upward trends.
However, it’s also important to look at stocks on a relative basis. Compared to bonds, stocks have performed less well. Interest rates have come down sharply this year, boosting the return on bonds. And with negative interest rates around the world and the Federal Reserve lowering short-term rates in the United States, bonds could rise further. Overall, then, the Market Action bucket is neither positive nor negative; it’s neutral
Investor Behavior: Neutral – At the end of the day, it’s important to remember that markets are made up of people. Sometimes people act rationally; other times, not so much. But even if we assume an individual investor is rational, a ripple of excitement can suddenly sweep over a crowd in a way that it can’t an individual. When this “madness of the crowd” reaches a point of extreme optimism or pessimism, it often pays to take the other side of the trade. We call this measure of extreme sentiment Investor Behavior, and it makes up the second major bucket.
Without going into too much detail, the overall message is mostly a neutral one. The four-week average flow of money pouring into stocks was very negative just a few weeks ago, but it has since turned slightly positive. That puts it in a neutral zone. But if money starts flowing in at a faster pace, it could lead to a level of extreme optimism, which is generally a sign of poor returns going forward.
Economic Data: Neutral – Lastly, I’ll briefly touch on the economic factors that affect the investing environment. The overall consensus in this bucket is positive. Given the drop in interest rates this year, stocks appear more favorable on a fundamental basis. We’ve also seen the Citigroup U.S. Economic Surprise Index rise sharply this month, an indication that the economic backdrop is improving relative to expectations. The flattened shape of the yield curve is the only real area of concern in this bucket. But even then, the positive consensus from the other sectors of the economy makes the whole bucket positive.