Markets rose this week as the official unemployment rate fell. Nonfarm payroll hiring missed analyst expectations, but hiring was still substantial enough to slightly lower the unemployment rate. PMI data from both the manufacturing and services sides of the economy impressed, beating expectations. Factory orders disappointed, highlighting continued challenges with supply chains. Overall, economic data continues to look encouraging, but inflation is still a threat. In spite of inflation risks, the economy remains well positioned to perform exceptionally in 2021 based on overall macroeconomic position. New COVID-19 infections moved substantially lower again this week, with 7 day moving averages decreasing by nearly 8K a day over the prior week, representing nearly a 35% reduction in infections. The most recent infection data puts the moving average at lows not seen since March 2020 during the pandemic’s first wave.
Overseas, developed markets underperformed emerging markets. European indices were mixed, while Japanese markets returned negative performance for the 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
Hiring was robust in May, but hiring still came in under analyst expectations. Payrolls still remain well under early 2020 levels, but hiring has been recovering at a brisk pace.
Broad market equity indices finished the week positive, with major large cap indices performing comparably to 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 mixed results this week. Energy and real estate outperformed, returning 6.68% and 3.04% respectively. Consumer discretionary and healthcare underperformed, posting -0.99% and -1.15% respectively. Energy maintains its lead in 2021 with a 45.33% return.
Oil rose this week as crude oil inventories shrunk more than expected. Energy markets have been highly volatile in the COVID era, but it appears that stability may be more of the norm given recent market fundamentals. 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 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 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 fell this week from 1.5943 to 1.5534 while traditional bond indices rose. Treasury yield movements reflect general risk outlook, and tend to track overall investor sentiment. Recently, expected increases in future inflation risk have helped elevate 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 loosened. 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 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 17.07, 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 consumer sentiment. Both will likely add further color to the inflation outlook.
More to come soon. Stay tuned.