Markets were mixed this week on disappointing economic data. Initial unemployment claims set another new pandemic era record low for the second consecutive week, but still missed analyst expectations. GDP data also underwhelmed, coming in roughly 3% under consensus expectations, but still tallying a robust 6.4%. The Fed offered a rosier than expected perspective in its press release Wednesday, marked by a positive change in language when addressing the state of the economy. Consumer sentiment also impressed, beating expectations to close out the month of April. Overall, the economy remains well positioned to perform exceptionally in 2021 based on the most recent economic data, even with a slightly disappointing round of releases this week. New COVID-19 infections moved substantially lower again this week, with 7 day moving averages decreasing by around 9K a day over the prior week. The most recent infection data puts the moving average near 50K new infections a day for the first time since October. 

Overseas, developed markets slightly underperformed emerging markets. European indices were mixed, with Japanese markets returning 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 mixed 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

Investors have taken a very bullish view on European cyclicals recently, driving valuation ratios between cyclicals and defensives to levels not seen in years. Some analysts worry that this could be overvaluation, while others believe it could be a prelude to a robust recovery in Europe.

Market Update

Equities

Broad market equity indices finished the week mixed, with major large cap indices outperforming small cap. Economic data has been 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 communications outperformed, returning 3.58% and 2.88% respectively. Healthcare and technology underperformed, posting -1.90% and -2.12% respectively. Energy maintains its lead in 2021 with a 29.87% return.

Commodities

Oil rose this week as crude oil inventories remained nearly unchanged. 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 slightly 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. 

Bonds

Yields on 10-year Treasuries rose this week from 1.5577 to 1.6257 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 slightly this week as spreads tightened. 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

The secret to investing is to figure out the value of something – and then pay a lot less.”

-Joel Greenblatt

FormulaFolios Indicators

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 23.42, 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 will see updated services and manufacturing PMI data. In addition, nonfarm payrolls will be released as well as updated official unemployment rates.

More to come soon. Stay tuned.