(Published Feb. 22nd, 2021)
Markets were mixed this week as a wide range of positive economic data was released. Retail sales crushed analyst expectations, coming in at 5.3% month over month growth. Additional good news came in the form of better than expected manufacturing data and PMI data.
The only disappointment this week came in the form of worse than expected initial unemployment claims, revealing a labor market which is still struggling to build positive momentum. On the federal stimulus front, Democrats are attempting to use a political maneuver to pass their stimulus package with simple majority.
The $1.9 trillion package being proposed is receiving strong resistance from republicans and even some moderate democrats. Oppositionists to the bill are against the size of the package as well as some specific provisions such as a federal minimum wage increase to $15 an hour. On the COVID-19 front, U.S. infections continue to recede at an encouragingly fast pace. The 7 day moving average has now dropped to below 70K daily infections for the first time since October, and is poised to be at early summer and late spring infection levels in two weeks if current trends hold.
Overseas, developed markets and emerging markets both rose. European markets were mixed while Japanese markets put up solid growth. Improving prospects against the pandemic should continue to help lift markets globally over time.
Markets were mixed this week as investors continue to assess the state of the global economy. While fears concerning global stability and health appear to be in decline, 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.
The recovery in the energy sector continues to attract attention. Recent options activity in European oil companies shows that investors believe there is still substantial upside to be had in the rebounding sector.
Broad market equity indices finished the week mixed, with major large cap indices outperforming small cap. Economic data has been encouraging, but the global recovery has a long way to go to recover from COVID-19 lockdowns.
S&P sectors returned mixed results this week. Energy and financials outperformed, returning 3.06% and 2.81% respectively. Utilities and healthcare underperformed, posting -1.99% and -2.45% respectively. Energy maintains its lead 2021 with a 20.65% return.
Oil fell slightly this week as energy markets stabilized after the large winter storm which hit the southern U.S. Energy markets have been highly volatile in the COVID era, 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 even 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 again to include not just global macroeconomics surrounding COVID-19 damage and recovery efforts, but also U.S. dollar value.
Yields on 10-year Treasuries rose this week from 1.208 to 1.336 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 fell this week as spreads still 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 continue to be administered at high rates, and investors warm to economic risk factors, likely helping stabilize volatility.
"The individual investor should act consistently as an investor and not as a speculator.”
-Ben Graham
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.
This week we will see Fed Chair Powell testify before congress. His testimony could have a substantial impact on a broad range of asset values from currencies to equities. There will also be updated durable goods orders as well as personal income and spending data.
More to come soon. Stay tuned.
(Weekly Market Updates authored by Joshua Grow, MBA)