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Investment Market Update Back to Baseline: July 14, 2020

Stocks rose again this week in light of new economic data. While new cases of Covid-19 have caused some states to begin restricting activities and infection rates seem to be increasing, new encouraging data seemed to win out in markets for the second consecutive week. Manufacturing and unemployment claims both moved in encouraging directions, returning results which beat expectations, helping to propel equities to finish the week mostly in the positive. Generally, hiring and manufacturing progress has encouraged investors, as they tend to be very reliable economic indicators. Both areas have a long way to go to recover lost ground resulting from the pandemic, but the pace of recovery so far has exceeded analyst expectations. As of market close this week, the SP500 is almost back to the level at which it started 2020.

The Future

Going forward, markets will likely be fixated first and foremost on the rate of recovery and any risks that pose a threat to its trajectory. Risks are obviously still prevalent, and the economy has certainly not reached a point of stability. Tensions with China continue to be an unknown 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 slowing of the opening process in the southern U.S. remains highly concerning, as infections are on the rise regionally. Further economic data in the coming weeks and months will hopefully shed further light on true economic conditions and help provide an accurate outlook for the pace of the economic recovery.

Overseas markets rose modestly, as encouraging U.S. data helped lift equities. However, all major European indices still returned negative results for the week. Japanese equities returned positive performance. As global economies continue to work towards reopening, analysts are hoping Covid-19 infections are brought back under control so that focus can dial in more on global recovery efforts.

Markets Rose

Markets rose this week, with most equity indices bringing in positive 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

Expectations of inflation in the Eurozone are now vastly outpacing European bank valuations. Banks globally have not fared well in the pandemic era, with European banks being no exception. Low prime rates tend to squeeze bank margins, making profitability more difficult to achieve.

Equities

Broad market equity indices finished the week mostly up, with major large cap indices outperforming small cap. Economic data has continued to impress, but the global recovery still has a long way to go to regain lost jobs and output.

S&P sectors returned mostly positive results this week, as broad market movements showed investors buying most sectors. Materials led the best performing sectors, followed by utilities, returning 4.02% and 3.78% respectively. Energy and financials performed the worst for the second consecutive week, posting -1.37% and -2.83% respectively. Technology leads the pack so far YTD, returning 14.91% in 2020.

Commodities

Commodities rose this week, driven by gains in gold and natural gas while oil declined. Oil markets have been highly volatile, with investors focusing on output and consumption concerns. Recent economic improvements have lifted demand outlook. As summer is likely to increase 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. Oil supplies have shrunk dramatically, as operating oil rigs have shrunk by nearly 70% since last year, further helping oil prices to recover.

Gold rose this week as markets reacted to increasing Covid infections and encouraging economic numbers. 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.

Bonds

Yields on 10-year Treasuries fell from 0.67% to 0.64% 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 slightly. 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.

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.

Indicators

Our investment team 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 the scale of 1 to 100. For the US Equity Bull/Bear indicator, we want it to read least 66.67% bullish. When those two things occur, our research shows market performance is strongest and least volatile.

The Recession Probability Index (RPI) has a current reading of 77.46, forecasting a higher potential for an economic contraction (warning of recession risk). The Bull/Bear indicator is currently 66.67% bullish – 33.33% bearish. 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).

The Week Ahead

This week will have updated retail sales, consumer sentiment, and manufacturing numbers. All three could have a dramatic impact on equities. And will provide valuable insight into the progress of the economic recovery.