Markets jumped for the second consecutive week this week as the novel coronavirus Covid-19 continued to weigh on the global economy and as shutdowns and quarantines remained in place around most of the globe. Equities have been on an upswing as investors have found discussions around reopening the U.S. economy encouraging. Most sectors finished in the green this week, reflecting general optimism surrounding the economy as a whole. Healthcare led the S&P sectors this week, finishing ahead of consumer discretionary and consumer staples to round out the strongest sectors. Investors are clearly anticipating the economy opening sooner than later and seem to expect damages from the shut downs to be short lived. Even as unemployment continues to skyrocket and public anxiety remains, markets are still finding justification for higher equity prices. Infection cases appear to be decreasing globally based on the most recent information, possibly bolstering the case to reopen economies.
Overseas, markets rose significantly less than U.S. indices. European markets declined as the source of the EU bailout funds for the virus outbreak remains undefined. All major European indices returned negative results. Japanese equities returned positive performance, as investors seem to remain encouraged by steps being taken to curb infections. After doing better than most developed countries initially, Japan is now starting to experience more widespread outbreaks, prompting an official state of emergency. Japan has the highest percentage of “at risk” population in the world, making containment absolutely critical.
Markets rose this week, with many major equity indices bringing in 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
Nasdaq 100 companies have risen to the highest premium levels over small cap equities in over 20 years. Ratios like this are likely to raise questions as to the relative valuations of prevalent tech companies in the U.S.
Broad market equity indices finished the week up, with major large cap indices outperforming small cap. Optimism continued this week, as stock prices rose in response to further indications that infection curves are flattening. Economic data, while certainly still negative, may be leveling out, as unemployment claims of 5.2 million actually came in lower than expected.
S&P sectors returned mostly positive results this week, as broad market movements showed investors favoring most sectors. Healthcare and consumer discretionary led the best performing sectors returning 7.19% and 6.68% respectively. Financials and materials performed the worst, posting -0.46% and 0% respectively. Healthcare now leads the pack so far YTD, returning -1.20% in 2020.
Commodities fell this week, as both gold and oil declined. Oil markets have been highly volatile, with investors focusing on geopolitical tension and global demand concerns. Global fears surrounding the virus outbreak have stoked demand concerns, as a significant impact on energy demand is expected as a result. Even after receiving some much needed support from the supply side as OPEC has officially cut output, prices still remain subdued.
Gold fell this week as talk surrounding the coronavirus has shifted. Gold is a common “safe haven” asset, typically rising during times of market stress. Focus for gold has shifted to global macroeconomics and public health concerns. Weakening real currency values resulting from massive stimulus measures may further support gold prices.
Yields on 10-year Treasuries dropped considerably from 0.72% to 0.64% while traditional bond indices rose. Treasury yields fell even as the efforts to contain the spread of Covid-19 appear to be yielding results and discussion on how to reopen the economy have resumed. Treasury yields will continue to be a focus as analysts watch for signs of changing market conditions.
High-yield bonds rose again 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 virus risk factors, likely driving increased volatility.
Lesson to be Learned
Invest for the long haul. Don’t get too greedy and don’t get too scared.”
-Shelby M.C. Davis
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 40.23, forecasting further economic growth and not warning of a recession at this time. However, with the unique economic circumstances caused by COVID-19, many economic indicators are expected to turn more negative as data is updated throughout the next month, which will increase the probability for a recession from the current reading. The Bull/Bear indicator is currently 0% bullish – 100% bearish, meaning the indicator shows there is a slightly higher than average likelihood of stock market decreases in the near term (within the next 18 months).
The Week Ahead
Markets continue to digest developments surrounding the coronavirus. While the infection appears to be in overall decline, it’s still wreaking havoc on markets. This week’s economic calendar includes manufacturing PMI, durable goods orders, and new unemployment claims.
More to come soon. Stay tuned.