Stocks climbed significantly this week as the U.S. presidential election has been called by the Associate Press for Democratic candidate Joe Biden. COVID-19 infections continue to increase, with new daily infections rising above 100K for the first time. Economic data impressed this week with manufacturing data, official unemployment rates and October hiring all beating expectations. Unemployment claims have been choppy but moving downwards, likely indicating slowly recovering labor markets. Recently, unemployment declines have slowed somewhat, prompting questions as to whether or not the recovery may be coming to a halt. The persistently high and increasing case rates of COVID-19 in the U.S. remain concerning, as some analysts believe restrictive measures may be reinstated by state governors. The increase in cases has been statistically correlated with schools reopening, and thus may continue for several more weeks.
Overseas, developed markets and emerging markets both soared. Global indices were seemingly encouraged at the prospects of a new administration and potentially more fiscal spending from the U.S. government.
Markets rose this week, with equity indices bringing in excitingly high 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
The U.S. labor market continues the tough slog through the COVID-19 pandemic towards recovery. While roughly half of the jobs lost from the pandemic have been recovered, nearly net 10M jobs have yet to be replaced since the outbreak.
Broad market equity indices finished the week up, with major large cap indices outperforming small cap. Economic data has been solid, but the global recovery is still threatened by COVID-19.
S&P sectors returned positive results this week. Technology and healthcare outperformed, returning 9.70% and 8.25% respectively. Utilities and energy underperformed, posting 2.79% and 0.81% respectively. Technology leads the pack so far YTD, returning 32.68% in 2020.
Commodities rose this week, driven by rising oil prices. Energy markets have been highly volatile, with oil investors focusing on output and consumption concerns. Demand is still likely to recover slowly however, and recent lockdown restrictions in Europe have raised doubts as to whether demand is going to continue in a positive direction. On the supply side, operating oil rigs are still well under early 2020 numbers, but trending upwards.
Gold rose this week as the U.S. dollar weakened. Gold is a common “safe haven” asset, typically rising during times of market stress. Focus for gold has shifted to global macroeconomics and recovery efforts.
Yields on 10-year Treasuries fell this week from 0.87% to 0.82% 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 remain volatile in the short to intermediate term as the Fed has adopted a remarkably accommodative monetary stance and investors flee economic risk factors, likely driving increased volatility.
Lesson to be Learned
Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”
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 36.71, 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 light on economic data, but will include updated inflation data as well as current unemployment claims.
More to come soon. Stay tuned.