Stocks fell this week even as consumer sentiment beat expectations and the world started implementing vaccination efforts. In the U.S., Pfizer’s COVID-19 vaccine is officially en route to nursing homes and frontline healthcare workers, and is being given priority shipping by FedEx and UPS to help expedite delivery. CVS and Walgreens pharmacies will be instrumental in delivering the vaccines, and plan to begin administering doses in nursing homes in the coming week. Rapidly progressing vaccination efforts are a welcome development as globally, COVID-19 infections continue to increase. New daily infections in the U.S. remain stubbornly high, and new infections remained above the 200K mark for most of the week. Economic data was sparse this week, but still revealed stubbornly entrenched unemployment claims. Recently, unemployment declines have slowed, prompting questions as to whether or not the labor market recovery may be coming to a halt or possibly reversing. Countering the disappointing unemployment claims was consumer sentiment, which beat analyst expectations. The persistently high and increasing case rates of COVID-19 in the U.S. remain concerning, but with vaccines being administered in the near future, hopefully normal economic activity can resume sooner than later.
Overseas, developed markets and emerging markets diverged, with emerging markets rising and developed markets sinking. Japan and Europe both moved with U.S. markets and fell for the week, even as vaccinations have begun being administered in Europe. Japan is likely to be behind the rest of the developed world in rolling out a vaccination program, as administration of doses is not likely to begin until at least March.
Markets declined this week, with only emerging market 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
U.S. oil futures have performed well as of late, notching six consecutive weeks of positive gains. Oil has been on a rollercoaster ride this year, with prices at one point even dipping into negative territory. From all time lows in the spring, prices have gradually recovered, with prices down about -17% YTD.
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 has a long way to go to recover from COVID-19 lockdowns.
S&P sectors returned mostly negative results this week. Energy and communications outperformed, returning 1.14% and 0.10% respectively. Financials and real estate underperformed, posting -1.76% and -2.88% respectively. Technology leads the pack so far YTD, returning 35.44% in 2020.
Commodities rose this week, driven by a rise in oil prices. Oil markets continue to show a significant responsiveness to the status of vaccination efforts, as normal economic conditions are critical to energy consumption. Now that vaccines are now being administered, oil prices have reached levels not seen since pre-pandemic. Energy markets have been highly volatile, but it appears that some stability may be on the horizon given recent developments. Demand is still likely to remain under pressure however, as lockdown restrictions in Europe as well as the U.S. have squeezed consumption. On the supply side, operating oil rigs are still well under early 2020 numbers, but trending upwards.
Gold rose slightly this week even 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 to global macroeconomics surrounding COVID-19 damage and recovery efforts. Recent declines in the precious metal could indicate increasing risk appetites.
Yields on 10-year Treasuries fell this week from 0.966% to 0.896% 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 didn’t move this week as spreads loosened. High-yield bonds are likely to decrease in volatility in the short to intermediate term as the Fed has adopted a remarkably accommodative monetary stance, vaccines begin rolling out, and investors warm to economic risk factors, likely driving stabilizing 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 28.74, 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
The Fed will be meeting this week and will likely be laying out guidance far beyond 2021. Additionally, retail sales and PMI numbers for manufacturing and services will be updated. Further manufacturing insight will also be provided through the Philly Fed manufacturing index as well as the Empire State index.
More to come soon. Stay tuned.