September 22, 2020
Stocks fell this week for a third straight week as the month of September continues to be a poor month for investors. Markets have trended down the last three weeks after setting all time highs on September 2. Economic data was mixed this week, marked by cooling retail sales but stronger than expected manufacturing and consumer sentiment. Unemployment claims continue to trend downwards, likely indicating slowly recovering labor markets. Unemployment claims are likely to remain elevated for several more weeks, but will likely continue to trend downwards. The unemployment rate remains below the peak of the great recession during 2008-2009. The persistently high case rates of COVID-19 in the U.S. remains concerning. While infection rates seemed to be slowly but steadily decreasing, the last week has seen a possible reversal in infections, a change possibly related to schools reopening. While there was a bipartisan effort to pass a $1.5 trillion stimulus package from the House, it is becoming increasingly unlikely that Congress will be able to pass a second round of stimulus. The Republican controlled Senate is against passing a high cost deficit funded stimulus package. Expectations are now for a stimulus package to be passed after the November elections.
Overseas, developed markets and emerging markets both rose. European indices returned negative results for the week. Japanese equities also returned negative performance. As global economies continue to work towards business as usual, 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 mostly negative 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.
The industrial sector could be hinting at an economic cycle shift in coming months. Industrials typically perform best in the early phase of an economic expansion, possibly indicating that the economy is about to emerge from the pandemic induced recession.
Broad market equity indices finished the week down, with major large cap indices underperforming small cap. Economic data has started to shift, 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. Energy and industrials outperformed, returning 2.90% and 1.52% respectively. Communications and consumer discretionary performed the worst, posting -2.31% and -2.33% respectively. Technology leads the pack so far YTD, returning 21.85% in 2020.
Commodities rose this week, driven by rising oil prices. Energy markets have been highly volatile, with oil investors focusing on output and consumption concerns. Demand is still likely to recover slowly however, as economic activity is not likely to recover instantly from the pandemic. On the supply side, operating oil rigs are still well under early 2020 numbers.
Gold rose this week as the precious metal benefited from a falling US dollar as well as 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.
Yields on 10-year Treasuries rose this week from 0.67% to 0.69% 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, causing spreads to tighten. 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.
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 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 38.99, 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 will see several high impact economic events. Chair Powell is scheduled to give testimony to congress this week. Additionally, new manufacturing and services PMI as well as durable goods data will be released, analysts will be looking for continued positive momentum as well as continuing dovish language from the Fed.