(Published Jan. 19th, 2021)
Markets receded this week as December retail sales numbers disappointed. Consensus expectations were for the retail segment to be flat month over month, but sales shrunk further, adding further concern to forecasts that are warning of a stalled economic recovery. Many politicians are asserting that the economy needs more stimulus to fully overcome the pandemic lockdowns, which could lead to further fiscal stimulus. The COVID-19 infection is continuing to spread across the world, but at decreasing rates this week, possibly indicating that policies and vaccines are having a positive effect.
Overseas, developed markets rose slightly while emerging markets fell. European markets were negative while Japanese markets rose. Improving prospects against the pandemic should continue to help lift markets globally over time.
Markets fell 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
Since 2013, European stocks have lagged behind U.S. stocks. Analysts are beginning to pay attention to European equities again, as many believe that Europe may be poised to start catching up.
Broad market equity indices finished the week down, 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. Energy and real estate outperformed, returning 3.13% and 1.86% respectively. Technology and communications underperformed, posting -2.62% and -3.56% respectively. Energy is off to a hot start for 2021 with a 12.74% return, possibly reflecting further recovery in the embattled sector.
Oil rose slightly this week as the embattled commodity continues its recovery. 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 slightly 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 fell this week from 1.115 to 1.084 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 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 have begun rolling out, and investors warm to economic risk factors, likely driving stabilizing 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 28.94, 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 manufacturing PMI numbers as well as an update to the NAHB housing index, likely providing valuable insight into two critical economic sectors.
More to come soon. Stay tuned.
(Weekly Market Updates authored by Joshua Grow, MBA)