Markets fell this week as markets grappled with a recovery that is looking more and more uncertain. Economic data was mixed, with disappointing readings coming from consumer sentiment along with industrial production, both of which came in under expectations. Retail sales came in above expectations, as did CPI. The most impactful event during the week was the senate testimony of Fed Chair Powell. Powell faced multiple questions concerning the Fed’s inflation outlook. Powell did his best to quell concerns and reassure markets that the inflation environment is temporary, but consistently rising inflation is beginning to spook consumers and some analysts. Overall, the economy is well positioned to continue recovering from pandemic lockdowns, but inflation risks eating into productivity.
Overseas, developed markets underperformed emerging markets, with developed indices returning negative performance. European indices were negative, while Japanese markets returned positive 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 mostly negative 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
The energy sector has been in a selloff during the month of July, reversing two prior months of gains. While oil demand is clearly on the rise, markets appear to be doubtful that oil companies are well positioned to capitalize on the conditions.
Broad market equity indices finished the week negative, with major large cap indices outperforming 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 were mixed this week. Utilities and consumer staples outperformed, returning 2.55% and 1.25% respectively. Consumer discretionary and energy underperformed, posting -2.63% and -7.72% respectively. Energy maintains its lead in 2021 with a 28.82% return.
Oil fell this week even as crude oil inventories shrunk more than expected. Energy markets have been highly volatile in the COVID era, but it appears that higher oil prices may be more of the norm given recent market fundamentals. Demand is still low compared to early 2020, but as global economies are continuing to open up, oil consumption is recovering rapidly. 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. A developing new dimension in the oil markets is the current impasse at OPEC. There is disagreement amongst the oil cartel members about how much the respective members will be able to increase production and any agreement is currently being held up. The outcome of this situation could have a dramatic impact on oil prices.
Gold rose 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 1.3595 to 1.2903 while traditional bond indices rose. Treasury yield movements reflect general risk outlook, and tend to track overall investor sentiment. Expected increases in future inflation risk have helped elevate yields since pandemic era lows in rates. Treasury yields will continue to be a focus as analysts watch for signs of changing market conditions.
High-yield bonds fell 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 and major economic risk factors subside, likely helping stabilize volatility.
Lesson to be Learned
The wise man bridges the gap by laying out the path by means of which he can get from where he is to where he wants to go.”
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 20.19, 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 existing home sales, housing starts, and NAHB housing indicator releases as well as services and manufacturing PMI numbers.
More to come soon. Stay tuned.