(Published Jan. 25th, 2021)
Markets rose this week as the most recent housing numbers impressed analysts. Building permits, housing starts, and existing home sales all beat expectations, while the NAHB housing index remains firmly in expansionary territory. In other good news, PMI numbers on both the service and manufacturing side beat expectations, adding further optimism and helping markets to close near all time highs. In addition to uplifting indicators, the new Biden administration has promised additional stimulus for the economy, further encouraging asset appreciation. On the COVID-19 front, U.S. infections now appear to be receding. The 7 day moving average has dropped back below 200K daily infections for the first time since the beginning of January.
Overseas, developed markets and emerging markets both rose. European markets were mixed while Japanese markets rose slightly. Improving prospects against the pandemic should continue to help lift markets globally over time.
Markets rose this week as investors continue to assess the state of the global economy. 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
Small cap stocks have been gaining market share in the S&P Composite 1500 index. Small cap stocks have underperformed up until recently, which has shown a substantial recovery in the S&P SmallCap 600 index.
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Broad market equity indices finished the week up, with major large cap indices underperforming small cap. Economic data has been inconsistent, and the global recovery has a long way to go to recover from COVID-19 lockdowns.
S&P sectors returned mostly negative results this week. Communications and technology outperformed, returning 5.95% and 4.38% respectively. Energy and financials underperformed, posting -1.56% and -1.81% respectively. Energy maintains its lead 2021 with a 10.97% return.
Oil fell slightly this week as the embattled commodity continues its recovery journey. Energy markets have been highly volatile, but it appears that further price support may be on the horizon given recent developments. Demand is still low, 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 to global macroeconomics surrounding COVID-19 damage and recovery efforts.
Yields on 10-year Treasuries rose this week from 1.084 to 1.086 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 rose slightly this week as spreads tightened. 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 have begun 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 28.94, 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 have a rate decision from the Fed as well as a press conference following the release. Most importantly, advance GDP numbers will be released, revealing the current state of the recovery from the COVID-19 lockdowns.
More to come soon. Stay tuned.
(Weekly Market Updates authored by Joshua Grow, MBA)