Markets fell last week as new cases of Covid-19 sprung up in the U.S. and around the world. Anxiety at the increasing infection rates dragged on stocks, driving the S&P500 to finish near two week lows. Encouragingly, durable goods orders came in above expectations, possibly hinting that a recovery in the manufacturing sector may be underway. Markets still seem concerned first and foremost with the state of recovery and any risks that pose a threat to its trajectory. Risks are obviously still prevalent, and the economy has certainly not reached a point of stability. Tensions with China continue to be an unknown and will likely remain in focus. Unemployment is likely to remain elevated for several more weeks, and the unemployment rate remains at the second highest level in history. An additional risk is the slowing of the opening process in the southern U.S., as infections are on the rise regionally. Further economic data in the coming weeks and months will hopefully shed further light on true economic conditions and help provide an accurate outlook for the pace of the economic recovery.
Overseas, markets also declined, as new risks to economic re-openings have weighed on markets. All major European indices returned negative results for the week. Japanese equities returned positive performance, bucking the trend of other developed economies. As global economies continue to work towards reopening, analysts are hoping Covid-19 infections recede further so that focus can dial in more on global recovery efforts.
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
Americans are starting to resume spending as the economy slowly returns to business as usual. While there is still quite a long way to go to recover lost ground, May saw it’s biggest increase in spending ever, hopefully indicating a more V shaped recovery.
Broad market equity indices finished the week down, with major large cap indices performing comparably to small cap. Economic data has mostly impressed, but the global recovery still has a long way to go to regain lost jobs and output.
S&P sectors returned negative results last week, as broad market movements showed investors selling out of all sectors. Technology led the best performing sectors, followed by consumer discretionary, returning -0.45% and -1.90% respectively. Financials and energy performed the worst, posting -5.25% and -6.44% respectively. Technology leads the pack so far YTD, returning 10.83% in 2020.
Commodities fell last week, driven by large losses in oil. Oil markets have been highly volatile, with investors focusing on output and consumption concerns. Recent economic improvements have lifted demand outlook, as summer is likely to increase consumption while normal economic activities should continue recovering. Demand is still likely to recover slowly however, as economic activity is not likely to recover instantly. Oil supplies have shrunk dramatically, as operating oil rigs have shrunk by nearly 70% since last year, further helping oil prices to recover.
Gold rose as markets reacted to increasing Covid infections. 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. Weakening real currency values resulting from massive stimulus measures may further support gold prices.
Yields on 10-year Treasuries fell from 0.69% to 0.64% while traditional bond indices rose. Treasury yield movements reflect general risk outlook, indicating that risk appetites may have fallen this week. Treasury yields will continue to be a focus as analysts watch for signs of changing market conditions.
High-yield bonds fell last week, causing spreads to loosen. 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.”
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.
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 the scale of 1 to 100. For the US Equity Bull/Bear indicator, we want it to read least 66.67% bullish. When those two things occur, our research shows market performance is strongest and least volatile.
The Recession Probability Index (RPI) has a current reading of 72.72, forecasting a higher potential for an economic contraction (warning of recession risk). The Bull/Bear indicator is currently 66.67% bullish – 33.33% bearish, 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).
The Week Ahead
This week will be shortened by the July 4 holiday, but the calendar still holds multiple economic releases which are likely to provide fresh insights into the state of the economy. Consumer confidence, ISM manufacturing PMI, and fresh non-farm payrolls should provide helpful updates for investors. Payroll numbers will be especially important, as consensus expectations are for significant improvements in hiring.
More to come soon. Stay tuned.