Markets rose this week as consumer confidence rose, manufacturing PMI numbers impressed, and nonfarm hiring beat expectations. Hiring was especially strong, beating expectations by over 250K. The economy seems well positioned to perform exceptionally in 2021 based on the most recent economic data. New COVID-19 infections moved slightly higher again this week, with 7 day moving averages increasing by around 4K a day over the prior week. The past two weeks have some analysts seeing cause for concern, as the decline in infections seems to be leveling off.
Overseas, developed markets underperformed emerging markets. European indices were positive, with Japanese markets also notching a positive week. Improving prospects against the pandemic as well as improved prospects for economic recovery should continue to help lift markets globally over time.
Markets were positive this week as investors continue to assess the state of the global economy. While fears concerning global stability and health appear to be in decline, the recent volatility serves as a great reminder of why it is so important to remain committed to a long-term plan and maintain a well-diversified portfolio. When stocks were struggling to gain traction last month, other asset classes such as gold, REITs, and US Treasury bonds proved to be more stable. Flashy news headlines can make it tempting to make knee-jerk decisions, but sticking to a strategy and maintaining a portfolio consistent with your goals and risk tolerance can lead to smoother returns and a better probability for long-term success.
Chart of the Week
High grade bonds had a historically bad quarter to start 2021. In the last 13 years, the only quarter to post worse returns was Q3 2008, during the start of the great recession.
Broad market equity indices finished the week mixed, with major large cap indices outperforming small cap. Economic data has been mostly encouraging, but the global recovery has a long way to go to recover from COVID-19 lockdowns.
S&P sectors returned positive results this week. Technology and communications outperformed, returning 4.71% and 3.04% respectively. Utilities and consumer staples underperformed, posting 1.16% and 0.93% respectively. Energy maintains its lead in 2021 with a 32.70% return.
Oil rose this week as crude oil inventories fell. Additionally, OPEC surprised markets by increasing its oil production output, further instilling confidence that energy markets are firming. Energy markets have been highly volatile in the COVID era, but it appears that stability may be more of the norm given recent developments. Demand is still low compared to early 2020, but as vaccinations proliferate, lockdown restrictions in Europe as well as the U.S. should start to loosen, helping support recovery. On the supply side, operating oil rigs are still well under early 2020 numbers, but trending upwards. In addition to supply and demand, a volatile dollar is likely to have a large impact on commodity prices.
Gold rose slightly this week as the U.S. dollar strengthened slightly. Gold is a common “safe haven” asset, typically rising during times of market stress. Focus for gold has shifted again to include not just global macroeconomics surrounding COVID-19 damage and recovery efforts, but also inflation and its possible impact on U.S. dollar value.
Yields on 10-year Treasuries rose this week from 1.6332 to 1.6699 while traditional bond indices rose slightly. Treasury yield movements reflect general risk outlook, and tend to track overall investor sentiment. Most recently, expected increases in future inflation risk have helped drive up yields. Treasury yields will continue to be a focus as analysts watch for signs of changing market conditions.
High-yield bonds rose this week as spreads tightened. High-yield bonds are likely to remain more stable in the short to intermediate term as the Fed has adopted a remarkably accommodative monetary stance, vaccines continue to be administered at high rates, and major economic risk factors subside, likely helping stabilize volatility.
Lesson to be Learned
Spend each day trying to be a little wiser than you were when you woke up.”
FormulaFolios has two simple indicators we share that help you see how the economy is doing (we call this the Recession Probability Index, or RPI), as well as if the US Stock Market is strong (bull) or weak (bear).
In a nutshell, we want the RPI to be low on a scale of 1 to 100. For the US Equity Bull/Bear indicator, we want it to read at least 66.67% bullish. When those two things occur, our research shows market performance is typically stronger, with less volatility.
The Recession Probability Index (RPI) has a current reading of 23.42, forecasting a lower potential for an economic contraction (warning of recession risk). The Bull/Bear indicator is currently 100% bullish, meaning the indicator shows there is a slightly higher than average likelihood of stock market increases in the near term (within the next 18 months).
It can be easy to become distracted from our long-term goals and chase returns when markets are volatile and uncertain. It is because of the allure of these distractions that having a plan and remaining disciplined is mission critical for long term success. Focusing on the long-run can help minimize the negative impact emotions can have on your portfolio and increase your chances for success over time.
The Week Ahead
This week will be lighter on economic data, with services PMI data as well as the most recent unemployment data being released. Additionally, Fed Chair Powell is scheduled to speak at a virtual conference on Thursday discussing the global economy.
More to come soon. Stay tuned.