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Weekly Market Digest: Don’t Let Emotions Dictate Portfolio Allocations

Initial post G-20 optimism on trade with China faded and stocks fell for the week. The arrest of Chinese telecom giant Huawei’s CFO in Canada over alleged Iran sanctions violations threatened to escalate tensions. Meanwhile, Friday’s jobs report showed the United States added fewer new jobs than expected. Some investors viewed the report favorably, believing it was strong enough to show the economy is still growing but soft enough to allow the Fed to slow interest rate hikes. Others viewed it as a sign growth has peaked. Bonds gained.

Weekly Returns

S&P 500: 2,633 (-4.6%)
FTSE All-World ex-US (VEU): (-3.1%)
US 10 Year Treasury Yield: 2.85% (-0.16)
Gold: $1,249 (+2.1%)
EUR/USD: $1.14 (+0.8%)

Major Events

  • Monday – President Trump named Robert Lighthizer, viewed as a China hard-liner, to lead trade negotiations.
  • Tuesday – Secretary of State Mike Pompeo said the United States would withdraw from a nuclear treaty unless Russia took steps to be compliant within 60 days.
  • Wednesday – U.S. equity markets were closed to honor former president George H.W. Bush.
  • Thursday – Canada arrested Huawei CFO Meng Wanzhou in a U.S. request for extradition, complicating trade negotiations with China.
  • Thursday – Lyft was reported to have filed confidential paperwork in preparation for a potential IPO early next year.
  • Friday – The United States added 155,000 jobs, which was below expectations, as was wage growth. Official unemployment remained at 3.7%, the lowest since 1969.
  • Friday – OPEC and partners agreed to cut 1.2 million barrels of oil production per day, which was larger than expected. Oil prices rose but remain sharply lower over the past month.

Our Take

There is a long list of reasons to be fearful of stocks right now – trade, inverted yield curve, Brexit, jobs, slowing housing market, loss of momentum in tech stocks, and negative returns for global stocks. None of that helps anyone know where stock prices are going next. It can be better to buy when risk feels high than when skies are blue.

Global stocks are down almost 10% so far in the fourth quarter. In this same period, U.S. bonds are up about 1%. Overall, 2018 has been a rough year for bonds. The U.S. Aggregate bond market remains down about 1%. That isn’t going to derail an investment portfolio, but no one buys bonds to lose money. It isn’t common. According to Ibbotson, intermediate term U.S government bonds have only been negative in about 10% of years since 1926. There have only been two years when both U.S. bonds and U.S. stocks finished in the red, which is a real possibility right now for 2018.

We urge investors not to let emotion or recent performance dictate allocations when it comes to stocks or bonds. Stocks have been wonderful at generating wealth over time. We expect they will continue to be so. They’ve also had some big down moves, and that won’t change either. Bonds are more stable.
What has become under-appreciated about bonds is their low or negative correlation to stocks. If you knew stocks were going to go up, you wouldn’t need to own bonds. But when stocks go down, it can feel great to have something in your portfolio going up, even if only moderately. For some, a nearly 100% allocation to stocks is appropriate. For others, that number is much lower. For most, bonds should make up most of the balance.

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