Stocks rose this week as employment data beat expectations, helping support optimism surrounding the economy. New economic data mostly beat expectations again this week, with manufacturing data in particular looking more encouraging. Unemployment claims remain elevated, but came in well below expectations. The S&P 500 remains firmly above the level at which it started 2020. Going forward, markets will likely continue to be fixated first and foremost on the rate of recovery and any risks that pose a threat to its trajectory, namely some form of economic shutdown. Tensions with China continue to rise, but remain difficult to quantify and will be watched carefully by analysts. Unemployment claims are likely to remain elevated for several more weeks, and the unemployment rate remains at the second highest level in history. The slowing of the reopening process in the southern U.S. remains highly concerning, as infections remain on the rise regionally. President Trump has issued an executive order to help deliver further stimulus into the economy while congress is still attempting to pass a second round of stimulus, but the House and Senate have made little progress on the key issue of enhanced unemployment benefits. 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 developed markets rose, as uncertainty surrounding the global economic recovery withdrew. All major European indices returned positive results for the week. Japanese equities returned negative performance. As global economies continue to work towards reopening and recover, analysts are hoping Covid-19 infections are brought back under control so that focus can dial in more on global recovery efforts.
Markets were encouraging this week, with equity indices bringing mostly positive 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
While big name tech stocks like Amazon and Microsoft make up 39% of the S&P 500 growth index and attract much of the spotlight, it’s helpful to see that other companies are displaying broad recovery as well. Excluding the FAANG stocks (Facebook, Amazon, Apple, Netflix, and Google) and Microsoft, the broad market as a whole is still recovering well.
Broad market equity indices finished the week up, with major large cap indices underperforming small cap. Economic data has continued to be mostly positive, but the global recovery still has a long way to go to regain lost jobs and output.
S&P sectors returned positive results this week, as broad market movements showed investors buying into all sectors. Industrials and financials led the best performing sectors, returning 4.76% and 3.26% respectively. Healthcare and real estate underperformed, posting 0.86% and 0.67% respectively. Technology leads the pack so far YTD, returning 24.10% in 2020.
Commodities rose this week, driven by energy and metals. Energy markets have been highly volatile, with oil 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 this week as markets reacted to Covid-19 data and as well as encouraging macroeconomic data. 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 rose from 0.53% to 0.56% 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, causing spreads to tighten. 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 57.46, 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).
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 updated retail sales numbers as well as consumer sentiment and unemployment numbers. These figures are highly important monthly indicators and will help further shape the outlook of economists going forward for the near future.
More to come soon. Stay tuned.