Markets rose this week as inflation remained muted and the dollar weakened. Market CPI came in at expectations, while core CPI did not change month over month. Unemployment claims came in above expectations, revealing a labor market which is still struggling to build positive momentum. On the federal stimulus front, the $1.9 trillion package being proposed by democrats is receiving strong resistance from republicans and even some moderate democrats. Oppositionists to the bill are against the size of the package as well as some specific provisions such as a federal minimum wage increase to $15 an hour. On the COVID-19 front, U.S. infections continue to recede at an encouragingly fast pace. The 7 day moving average has dropped to below 100K daily infections for the first time since early November, and is poised to be at late summer infection levels in a matter of weeks if current trends hold.

Overseas, developed markets and emerging markets both rose. European markets were mixed while Japanese markets rose considerably. Improving prospects against the pandemic should continue to help lift markets globally over time.

Markets rose 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

European companies are kicking the debt can further down the road. Investment grade debt is now substantially weighted to a longer time frame, with the largest shift reallocating towards a 2025 maturity date.

Market Update

Equities

Broad market equity indices finished the week up, with major large cap indices underperforming small cap. Economic data has been steadying, 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 technology outperformed, returning 4.33% and 2.30% respectively. Consumer discretionary and utilities underperformed, posting -1.26% and -1.79% respectively. Energy maintains its lead 2021 with a 17.07% return.

Commodities

Oil rose substantially again this week as energy markets continue their recovery. The winter storm that took hold of much of the U.S. has helped give a boost to oil prices. Energy markets have been highly volatile in the COVID era, but it appears that further price support may be on the horizon given recent developments. Demand is still low, 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 rose 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 values. 

Bonds

Yields on 10-year Treasuries rose this week from 1.164 to 1.208 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 rose this week as spreads tightened. High-yield bonds are likely to decrease in volatility in the short to intermediate term as the Fed has adopted a remarkably accommodative monetary stance, vaccines have begun rolling out, and investors warm to economic risk factors, likely helping stabilize volatility.

Lesson to be Learned

The wise man bridges the gap by laying out the path by means of which he can get from where he is to where he wants to go.”

-J.P. Morgan

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 28.06, 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

While this week is shortened by a trading day, we will still see multiple economic data releases. This week will have manufacturing indices from the Philly Fed and Empire State Manufacturing Index in addition to manufacturing PMI data, as well updated housing indicators and retail sales. Markets will likely be especially hopeful for growth in retail sales as COVID lockdowns have hurt consumer spending.

More to come soon. Stay tuned.