Stocks rose again this week as PMI numbers and existing home sales soared, helping propel the S&P 500 to close at all time highs on Friday. There seems to have been a streak of better than expected economic news lately, but markets will likely continue to be fixated on the rates of further recovery and any risks that pose a threat to its trajectory. Tensions with China remain elevated, but such variables are difficult to quantify and will be watched carefully by analysts. Unemployment claims are likely to remain elevated for several more weeks, and the unemployment rate remains at the second highest level in history. The persistently high case rates of COVID-19 in the southern U.S. remains highly concerning, but infection rates seem to have levelled off and appear to be slowly but steadily decreasing. Congress is still attempting to pass a second round of stimulus, but the Democrat controlled House and Republican controlled Senate remain deadlocked. Further economic data in the coming weeks and months will likely help provide a more accurate outlook for the economic recovery.
Overseas developed markets fell, as the outlook surrounding the global economic recovery wavered. All major European indices returned negative results for the week as PMI numbers for the EU came in under expectations. Japanese equities also returned negative performance. As global economies continue to work towards reopening and recover, analysts are hoping Covid-19 infections are brought further under control so that focus can dial in more on global recovery efforts.
Markets were mixed this week, with equity indices bringing in regionally dependent returns. 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
Existing home sales skyrocketed in July, reaching levels not seen in almost 15 years. Historically low mortgage rates have helped propel the housing market to return to form since the pandemic outbreak.
Broad market equity indices finished the week mixed, with major large cap indices outperforming small cap. Economic data has continued to be mostly positive, but the global recovery still has a long way to go to regain lost jobs and output.
S&P sectors returned mixed results this week, as broad market movements showed investors favoring mostly non-cyclical sectors. Technology and consumer discretionary led the best performing sectors, returning 3.48% and 2.42% respectively. Financials and energy underperformed, posting -3.40% and -6.11% respectively. Technology leads the pack so far YTD, returning 28.55% in 2020.
Commodities rose this week, driven by energy prices. Energy markets have been highly volatile, with oil investors focusing on output and consumption concerns. Recent economic improvements have lifted demand outlook, as summer has increased consumption while normal economic activities should continue recovering. Demand is still likely to recover slowly however, as economic activity is not likely to recover instantly. While oil supplies have shrunk dramatically, active domestic oil rigs have increased for the first time in March, possibly indicating further recovery in the supply side of the oil markets. Operating oil rigs are still well under early 2020 numbers.
Gold fell marginally this week as markets reacted to Covid-19 data and as well as encouraging macroeconomic data. Gold is a common “safe haven” asset, typically rising during times of market stress. Focus for gold has shifted to global macroeconomics and recovery efforts. Weakening real currency values resulting from massive stimulus measures may further support gold prices.
Yields on 10-year Treasuries fell from 0.71% to 0.63% 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 this week, but spreads still loosened. High-yield bonds are likely to remain volatile in the short to intermediate term as the Fed has adopted a remarkably accommodative monetary stance and investors flee economic risk factors, likely driving increased volatility.
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 46.89, 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 durable goods orders as well as the annual Jackson Hole Symposium. Durable goods figures are a highly important manufacturing indicator and the Jackson Hole Symposium will provide a platform for some of the most influential economists and policy makers from around the world. Markets will be focused on any change in perspective from central bankers in particular.
More to come soon. Stay tuned.