In a dynamic week, financial markets exhibited encouraging trends as witnessed by diverging price action among the various asset classes and global markets. While it was another down week for domestic equities, with the S&P 500® Index off 1.4%, European exchanges were up roughly .5%. In Asia as well, we witnessed divergences with the Hang Seng Index losing 3.1%, while the NIKKEI in Tokyo gained 0.53%. Despite the bond bears’ best efforts, including considerable short selling, Treasury prices rallied over 1% last week, sending long rates down for the second week in a row. The yield on the U.S. ten-year, which two months ago was flirting with 3%, fell to 2.77% on Friday. In domestic equities, both technology and industrial shares declined 2%, some of which was trade related and some was self-inflicted. The marquee names in both groups could suffer fallout from the trade spat, but the market overlooked what was very encouraging news for the same companies. Boeing, for example, landed a 47-plane order from American Airlines and is the top competitor for what will likely be a $200 billion fighter plane order from India. What is abundantly clear is that volatility across all asset classes has returned and global growth may be synchronized, but global financial markets will be anything but that. This is all very encouraging, as the uniformity of markets during the post-crisis period led investors to question the benefits and, therefore, need to diversify. Clearly, recent events validate both the defensive need and potential reward for risk managing investment portfolios.
An item to watch for in the coming days will be if the market holds above its two-hundred-day moving average price. This is all about market psychology and not about market valuation. Once upon a time, financial academia likened technical analysis to the reading of an owl’s entrails – the stuff of superstition. But, the problem was the same dynamics kept cropping up repeatedly, so the practice was given a new scientific name (behavioral finance) and, thus, became a legitimate investment consideration. The point of this being that we have been flirting with the two-hundred-day tripwire recently, and each time the market has stepped back. This is relevant because if we do not violate that threshold, this correction may continue to grind on for another couple of months while the excesses are worked out. If it fails to hold, well that is the subject of another letter.
For a PDF version of this publication, click here: 04.09.2018_WeeklyMarketOverview
Source: All statistics herein obtained from Bloomberg.
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