(Published Feb. 8th, 2021)
Markets rose this week in spite of disappointing hiring in January. Economists expected hiring at 85K, but the actual figures came in at 49K. In positive news, PMI numbers from the services and manufacturing sectors remain firmly in expansionary territory, helping support market optimism. Equities also likely received a boost from another potential stimulus in the pipeline, a package estimated to be in the $1.5-$2.0 trillion range. The package is expected to include another round of direct payments to US citizens. On the COVID-19 front, U.S. infections continue to recede. The 7 day moving average has dropped to roughly 118K daily infections for the first time since early November.
Overseas, developed markets and emerging markets both rose. European markets rose while Japanese markets followed suit. 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
Longer term unemployment is looking especially dim in the COVID era. Americans are staying unemployed for the longest stretch of time since the aftermath of the financial crisis.
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Broad market equity indices finished the week up, with major large cap indices underperforming small cap. Economic data has been steadying, but the global recovery has a long way to go to recover from COVID-19 lockdowns.
S&P sectors returned exclusively positive results this week. Energy and communications outperformed, returning 8.29% and 7.26% respectively. Utilities and healthcare underperformed, posting 2.26% and 0.5% respectively. Energy maintains its lead 2021 with a 12.22% return.
Oil rose substantially this week as energy markets continue their recovery. 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 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 rose this week from 1.066 to 1.164 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 helping stabilize volatility.
Lesson to be Learned
"The individual investor should act consistently as an investor and not as a speculator. This means … that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money’s worth for his purchase.”
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 28.06, 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 updated CPI numbers as well as consumer sentiment indicators. Both could provide insights into price consumption and price movements.
More to come soon. Stay tuned.
(Weekly Market Updates authored by Joshua Grow, MBA)