Stocks fell slightly even as a $900 billion stimulus was signed. Congress continues to argue about further direct payments to Americans, making the final week of 2020 crucial for passing legislation quickly. Economic data was sparse this week, but still revealed better than expected unemployment claims. The U.S. has begun vaccinating health professionals and at-risk individuals with millions of doses set to be distributed before the end of the year. The persistently high and increasing case rates of COVID-19 in the U.S. remain concerning, but with vaccines being administered, hopefully normal economic activity can resume sooner than later.
Overseas, developed markets and emerging markets both fell, with emerging markets underperforming developed markets. Japan and most of Europe both moved with U.S. markets and fell for the week. Improving prospects against the pandemic should help lift markets globally over time.
Markets fell this week, bringing in small negative returns. Fears concerning global stability and health are an unexpected factor in asset values, and 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
All streaks eventually come to an end. After 7 weeks of gains, crude oil finally posted a losing week. Oil markets continue to watch the pandemic situation closely as a recovery in consumption largely hinges on a return to normal economic activity.
Broad market equity indices finished the week down, with major large cap indices underperforming small cap. Economic data has been mostly solid, but the global recovery has a long way to go to recover from COVID-19 lockdowns.
S&P sectors returned mostly negative results this week. Financials and technology outperformed, returning 1.15% and 0.48% respectively. Real estate and energy underperformed, posting -2.13% and -3.67% respectively. Technology leads the pack so far YTD, returning 40.93% in 2020.
Oil fell slightly this week as pandemic concerns continue. Oil markets continue to show a significant responsiveness to the status of vaccination efforts, as normal economic conditions are critical to energy consumption. Now that vaccines are now being administered, oil prices have reached levels not seen since pre-pandemic. Energy markets have been highly volatile, but it appears that some stability may be on the horizon given recent developments. Demand is still likely to remain under pressure however, as lockdown restrictions in Europe as well as the U.S. have squeezed consumption. On the supply side, operating oil rigs are still well under early 2020 numbers, but trending upwards.
Gold fell 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 to global macroeconomics surrounding COVID-19 damage and recovery efforts.
Yields on 10-year Treasuries fell this week from 0.933% to 0.923% while traditional bond indices rose. 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 driving stabilizing volatility.
Lesson to be Learned
If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.”
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 28.74, 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
Due to the New Year holiday, this week will again be a shortened trading week and sees no high impact economic releases.
More to come soon. Stay tuned.