With 2020 officially in the books, 2021 is off to the races. The story for 2020 began and ended with COVID-19, and the pandemic still has a firm grip on the world as we move into a new year. With two approved vaccines being administered, hopefully 2021 can be a year centered around recovery rather than economic shutdowns and infection numbers. Markets rose this week to finish out the year, ending at new all time highs even as infections remain near all time highs. Congress is debating further stimulus to the American people, but a consensus has not been reached.
Overseas, developed markets and emerging markets both rose, with emerging markets outperforming developed markets. European markets were mixed while Japanese markets moved with U.S. markets and rose for the week. Improving prospects against the pandemic should help lift markets globally over time.
Markets rose this week, bringing in a decent return to finish out the year. 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
2020 was a wild ride for markets. During the worst of the pandemic panic, few would have predicted the S&P 500 would close the year at new all time highs. In addition to a new record, the benchmark index posted a 16% return for the year, an excellent return for a normal year but a truly exceptional return for one which experienced a damaging black swan event.
Broad market equity indices finished the week up, with major large cap indices outperforming small cap. Economic data has been mostly solid, but the global recovery has a long way to go to recover from COVID-19 lockdowns in 2021 and beyond.
S&P sectors returned mostly positive results this week. Utilities and consumer discretionary outperformed, returning 2.50% and 1.98% respectively. Industrials and energy underperformed, posting 0.73% and -0.43% respectively. Technology took the crown for 2020, returning 42.21% for the year.
Oil rose 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. 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 weakened. 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 0.923% to 0.913 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
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 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
This week sees a full week of high impact economic releases, including manufacturing and services PMI numbers as well as non-farm payrolls and an updated unemployment rate.
More to come soon. Stay tuned.