Stocks declined this week as COVID-19 infections continue to increase globally. Economic data mostly improved this week, with PMI, unemployment claims, and housing data beating expectations. Unemployment claims have been choppy but moving downwards, likely indicating slowly recovering labor markets. Recently, unemployment declines have slowed, prompting questions as to whether or not the recovery is coming to a halt. The persistently high and increasing case rates of COVID-19 in the U.S. are concerning, as some analysts believe restrictive measures may be reinstated by state governors. The increase in cases has been statistically correlated with schools reopening, and thus may continue for several more weeks. Negotiations toward a second stimulus package remain mired in partisan squabbling. It is now almost certain that a stimulus package will not be passed before the election and possibly not even this year.
Overseas, developed markets and emerging markets both rose. European indices returned mostly negative results for the week, while Japanese equities returned positive results. Increasing COVID-19 infections in Europe have prompted France, Spain, and Italy to implement measures to restrict spread of the disease.
Markets were mixed this week, with equity indices bringing in a range of positive and negative 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
For the first time since early 2020, individual investors are more bullish than bearish. When the pandemic first hit markets, individual investors were bearish and believed equity prices were likely to decline. A majority of investors now believe that equity prices are likely to increase.
Broad market equity indices finished the week mixed, with major large cap indices underperforming small cap. Economic data has been solid, but the global recovery is still threatened by COVID-19.
S&P sectors returned mixed results this week. Communications and utilities outperformed, returning 2.13% and 1.18% respectively. Consumer staples and technology underperformed, posting -1.39% and -2.21% respectively. Technology leads the pack so far YTD, returning 29.31% in 2020.
Commodities fell this week, driven by falling oil prices. Energy markets have been highly volatile, with oil investors focusing on output and consumption concerns. Demand is still likely to recover slowly however, as economic activity is not likely to recover instantly from the pandemic. On the supply side, operating oil rigs are still well under early 2020 numbers, but trending upwards.
Gold fell this week, settling only slightly lower than last week’s close. 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.
Yields on 10-year Treasuries rose this week from 0.75% to 0.84% 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 rose negligibly this week as spreads tightened. 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
Spend each day trying to be a little wiser than you were when you woke up.”
– Charlie Munger
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 36.71, 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 durable goods numbers as well as advance Q3 GDP numbers. As the U.S. presidential election nears, markets are likely to become increasingly focused on its outcome over other factors.
More to come soon. Stay tuned.