High volatility was the prevailing theme this week with trade uncertainty and worries about a flattening yield curve at center stage. Stocks finished lower, but bonds had their best weekly performance since May as investors fled for safety. The week started on a strong note after the U.S. and China agreed at the G20 summit to ceasefire and not to impose any additional tariffs for 90 days as they negotiate an agreement. The initial optimism later turned sour as investors realized that no substantive agreement was reached and a quick resolution is far from guaranteed. Adding to the uncertainty, news that a Chinese tech company's CFO was arrested in Canada on allegations of violating U.S. trade sanctions further complicated matters. The other key issue that unnerved investors was the U.S. and Canadian Treasury curves as the 3-year rates exceeded 5-year rates, raising fears of an inverted yield curve and the belief that it's signaling a downturn ahead. While we are not dismissive of the risks, we think that such predictions are premature. A more reliable measure to monitor is short-rates (3-month) compared to 10-year rates. This yield curve is flatter, but is still positively-sloped, not inverted. Finally, the action-packed week ended with an OPEC agreement to cut oil production and Novembers' job reports in both U.S. and Canada.
When it comes to the market, there are typically two sides to every coin. At times, one side can be much shinier than the other, or one side can turn up rather consistently for stretches of time. And then there are times when both sides – the good and the bad news – compete for the market's eye with every flip.
Trade, interest rates and jobs were all front and center last week, with each issue offering two sides of the story. The outcome was wide market swings, including
Last week, four key issues were in focus:
1. The yield curve inverted…sort of.
4. Stock market pullback: ongoing or opportunity?
We still think there is plenty of shine left on the positive side of the market's coin, but as we progress in the latter stages of this cycle, attention will shift between heads and tails. In other words, the path ahead for the market is not up to chance and we expect the still-positive fundamental backdrop to provide support against worrisome headlines. We don't think this is a prelude to a prolonged, severe downturn, but we haven't seen the last of these market swings.
Craig Fehr, CFA
Angelo Kourkafas, CFA
|S&P 500 Index||2,633||-4.6%||-1.5%|
|10-yr GoC Yield||
Source: Bloomberg, 12/07/18. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results.
Housing data dominate the economic calendar next week with starts and permits scheduled to be released on Monday and new home prices on Thursday. An important international event to pay attention to will be the Brexit vote in UK Parliament scheduled for Tuesday.
The Weekly Market Update is published every Friday.
Edward Jones does not provide access to past weekly summaries.
The S&P/TSX Composite Index and S&P 500 Index are unmanaged indices and cannot be invested into directly.
Diversification does not guarantee a profit or protect against loss
Dividends may be increased, decreased or eliminated at any time without notice.
Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk.
Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.
The value of investments fluctuates and investors can lose some or all of their principal.
The content of this report is for informational purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation. While the information is believed to be accurate, it is not guaranteed and is subject to change without notice.
"Member - Canadian Investor Protection Fund"
Diversification does not guarantee a profit or protect against loss.
Get instant quotes for your favorite companies and mutual funds.