Countless chart trends have played out this year, and depending on how much significance you place on identifying trends, their interpretation may have potential implications for investors as we head into the new year. Here are 3 important charts for investors to consider.
The fundamental picture
It's been an up and down year for markets, as investors grappled with stellar earnings growth, central bank rate increases, global trade wars, and more.
Generally, stocks have weakened thus far this year: The MSCI World Index is down 7%, as of December 11, 2018. In the US, stocks are broadly flat year to date. Yet S&P 500 earnings are forecast to climb 21% year over year, nearly double the initial estimate of 11%, due in large part to the corporate tax cut passed in late 2017.* This earnings strength has anchored the market amid the myriad of risk factors causing periods of market volatility.
Stocks send some bearish signals
Despite the underlying earnings strength, there have been 2 mild, yet relatively rapid corrections (a price decline of 10% or more) for the S&P 500 in 2018.
Those declines resulted in the S&P 500 trading below its 50-day simple moving average multiple times throughout the year, yet the index only crossed and held below its 200-day moving average during the second correction (in late October).
One moving average crossover occurred (when a fast moving average crosses above or below a shorter moving average), and it happened recently. It was a death cross (a sell signal)—when the 50-day moving average crossed below the 200-day moving average in early December (see US stocks set new record highs in 2018, but those gains have since been erased).
A death cross is considered one of the more valid chart patterns among technical analysts. Additionally, a "head and shoulders" pattern may be unfolding as well. If you look at the chart above, the left "shoulder" of the pattern formed in October around the 2,800 range, followed by the "head" around 2,940 in early November. It appears the right shoulder has formed in early December. If the price breaks below the "neckline," which was formed around 2,640 in late October and late November, that would be another bearish chart signal.
Looking under the surface of the broad market, some parts have exhibited weaker relative strength, including the materials, energy, and recently constituted communication services sector—which now includes several of the large, high-profile FANG stocks that have contributed significantly to the recent market decline.
Rates on the rise
While global stocks have been declining, interest rates have generally risen.
An unfolding development for the US bond market over the course of 2018 has been the possibility of a yield curve inversion. The Federal Reserve hiked the fed funds rate 3 times thus far this year, pushing short-term rates to multiyear highs. However, longer-term rates have not risen as fast, potentially causing what is described as an inversion of the yield curve—where shorter-term rates are actually higher than longer-term rates (see Is an inversion of the yield curve on the horizon?).
In the chart above, you can see the pace of increase for shorter-term yields accelerated at a greater clip as far back as late 2017.
The significance here is that there is a historical correlation between an inverted yield curve and recessions. However, this indicator is by no means a sure thing. Moreover, the historical impact has not typically been felt immediately after the inversion takes place. Perhaps more importantly, each economic cycle is unique, and there are many reasons to believe that a recession is not imminent.
With that said, the trend of declining correlations between bond yields and stock prices continued this year, as has been the case since 2015. "I don't believe it is correct to argue that a change from positive to negative stock/bond correlations as rates continue to rise is going to cause an immediate bear market," says Jurrien Timmer, director of global macro at Fidelity. "However, I do think it is safe to say that the stock market may not be able to rise as much as it would were interest rates and inflation to stay low."
Commodities a mixed bag
Commodities are another part of the market that has had a somewhat tumultuous year. The Bloomberg Commodity Index is down about 1% year to date. Among the the most widely followed commodities, West Texas crude oil is off 7%, gold has shed 4%, silver has dulled 14%, aluminum has plunged 14%, and copper is down 18%.
Food commodities, including soybeans, wheat, and corn, have also been in focus by financial news media this year because of their prominent role in global trade wars. Soybeans in particular have been in the spotlight after China—the world's largest buyer of soybeans—put a 25% tariff on US imports in July, and has threatened to completely cut soybean imports amid the trade dispute between the world's 2 largest economies. The price of soybeans plummeted precipitously in June on the initial announcement, and are down 4% year to date (see chart below, left).
Wheat and corn are among the few commodities that have weathered the storm well, up roughly 22% and 9% year to date, respectively. Speaking of corn, the right chart below shows just how impactful trade disputes have been on the price of commodities that have been subject to tariffs (see chart below, right).
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Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.
In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible. Any fixed income security sold or redeemed prior to maturity may be subject to loss.
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