Markets rose this week as non-farm payroll hiring in February beat expectations. Net hiring came in at 397K when consensus expectations were for net hiring to come in at 197K. PMI numbers were also encouraging, with both the services and manufacturing sectors remaining firmly in expansionary territory. On the federal stimulus front, the $1.9 trillion package has officially been passed by the U.S. senate, and is expected to be signed by the president this coming week. COVID-19 has resumed its decline, with 7 day moving averages decreasing by nearly 10K daily infections over the week. U.S. infections appear to be declining at a slower pace than in January and the first half of February. Some additional good news on the battle against the pandemic comes in the form of an additional approved vaccine from Johnson and Johnson, and the company is expected to be able to deliver 4 million doses of their one-shot vaccine a week. 

Overseas, developed markets outperformed emerging markets. European rose while Japanese markets fell. Improving prospects against the pandemic should continue to help lift markets globally over time.

Markets were mixed 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

Rising yields appear to have damaged prospects for a European recovery. The EU momentum index has dropped dramatically in response to rising global yields, raising the possibility of a lackluster economic recovery from the pandemic.

Market Update

Equities

Broad market equity indices finished the week mixed, with major large cap indices outperforming small cap. Economic data has been encouraging, but the global recovery has a long way to go to recover from COVID-19 lockdowns. 

S&P sectors returned mostly positive results this week. Energy and financials outperformed, returning 10.09% and 4.29% respectively. Real estate and technology underperformed similarly along with consumer discretionary, posting -1.36% and -2.82% respectively. Energy maintains its lead 2021 with a 38.58% return.

Commodities

Oil rose this week as oil markets continue to solidify. Helping support prices this week was an unexpected maintenance of the status quo by OPEC. Many analysts expected OPEC to start increasing supply with the recovery in crude prices. Energy markets have been highly volatile in the COVID era, but it appears that price stability may be on the horizon 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 weakening dollar is likely to have a large impact on commodity prices. 

Gold fell again this week as the U.S. dollar strengthened. 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 U.S. dollar value. 

Bonds

Yields on 10-year Treasuries rose this week from 1.405 to 1.566 while traditional bond indices fell. Treasury yield movements reflect general risk outlook, and tend to track overall investor sentiment. Treasury yields will continue to be a focus as analysts watch for signs of changing market conditions.

High-yield bonds fell 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

Invest for the long haul. Don’t get too greedy and don’t get too scared.”

-Shelby M.C. Davis

FormulaFolios Indicators

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 23.49, 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 we will see updated CPI numbers as well as the University of Michigan consumer sentiment indication. On the political front, president Biden is expected to deliver an address Thursday addressing the one year anniversary of pandemic shutdowns.

More to come soon. Stay tuned.