Markets rose this week as unemployment claims and consumer sentiment both beat expectations. Improvements in both indicators likely helped lift the SP500 index the closest it has ever been to the 4000 mark. Also taking place on Thursday was the official passage of the new federal stimulus bill, coming in at a price tag of $1.9 trillion. The biggest highlight of the bill includes $1400 in direct payments to individuals making under a certain threshold. New COVID-19 infections moved little this week, with 7 day moving averages increasing negligibly. U.S. infections appear to be declining at a slower pace, but overall still seem to be exhibiting downward momentum.
Overseas, developed markets outperformed emerging markets. European and Japanese markets all rose substantially, reflecting similar optimism to U.S. markets. Improving prospects against the pandemic as well as improved prospects for recovery should continue to help lift markets globally over time.
Markets were positive 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
Treasury yields on 10 year Treasuries are back to levels not seen since pre-shutdown. Rising yields have some cheering, saying that they signal recovery. Others are sounding alarm, saying they mean that inflation will rise substantially.
Broad market equity indices finished the week up, with major large cap indices underperforming 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 exclusively positive results this week. Consumer discretionary and real estate outperformed, returning 5.74% and 5.71% respectively. Energy and communications underperformed, posting 1.08% and 0.71% respectively. Energy maintains its lead in 2021 with a 40.08% return.
Oil fell slightly this week as crude oil inventories unexpectedly increased. Energy markets have been highly volatile in the COVID era, but it appears that price stability may be on the horizon given recent developments. 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 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 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 rose this week from 1.566 to 1.6247 while traditional bond indices fell. 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 fell this week as spreads didn’t change. 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 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 23.49, 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 we will see updated retail sales, manufacturing, and housing indicators, as well as a Fed statement and press conference following a new rates announcement.
More to come soon. Stay tuned.