(Published Jan. 11th, 2021)
Markets rose to all time highs this week even as December hiring numbers disappointed. Consensus expectations were for positive hiring in the 50K range, but came in negative at -140K. The official unemployment rate fell further, ending 2020 at 6.7%. Encouragingly, December PMI data impressed on both the manufacturing and services side, revealing aspects of the economic recovery that continue to impress. The pandemic is continuing to spread across the world, but with two effective vaccines now developed and being administered, 2021 could finally defeat the COVID-19 disease.
Overseas, developed markets and emerging markets both rose, with emerging markets outperforming developed markets. European markets were positive along with Japanese markets. Improving prospects against the pandemic should continue to help lift markets globally over time.
Markets rose this week, starting 2021 on a high note. 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
With democrats retaking the white house and congress, investors have bought up green energy shares in anticipation of a more environmentally focused agenda. Price to earnings ratios of the alternative energy stocks now almost double the P/E ratios standard ESG stocks.
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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 positive results this week. Energy and materials outperformed, returning 9.31% and 5.68% respectively. Consumer staples and real estate underperformed, posting -0.98% and -2.55% respectively. Energy is off to a hot start for 2021, possibly reflecting further recovery in the embattled sector.
Oil rose this week as Saudi Arabia unexpectedly announced an oil production cut. In addition to a surprise reduction in supply, now that vaccines are now being administered, demand could see a slow recovery over time. Energy markets have been highly volatile, but it appears that further price support may be on the horizon given recent developments. Demand is still likely to remain under pressure, 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 fell this week 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.
Yields on 10-year Treasuries jumped this week from 0.913 to 1.115 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 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
Know what you own, and know why you own it.”
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 sees updated retail sales as well as fresh CPI numbers, with updated unemployment claims also being released.
More to come soon. Stay tuned.
(Weekly Market Updates authored by Joshua Grow, MBA)