Off to to the Races for 2020
Markets finished mixed in the first week of 2020, with major equity indices only deviating slightly from the prior week. Industrials took the lead, finishing ahead of energy and technology to round out the strongest sectors. Due to the shortened holiday trading week, markets had a comparatively calm week. Volumes and volatility should pick back up as 2020 hits its stride.
European indices kicked off 2020 with mostly negative returns, finishing down almost across the board. Due to the shortened trading week, most prominent indices did not deviate much from the previous week. Japan observed the entire week of the New Year as a market holiday, and thus did not register a return.
Markets started the new year quietly, with most major indices not deviating much from the prior week. Though markets have been quieter than normal because of the holidays, the volatility in prior weeks and months still 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
Gold appears to be rising due to the increases in geopolitical risks. While global growth concerns remain and are certainly putting upward pressure on the precious metal, the most recent factor driving up gold prices appear to be tensions between the U.S. and other global players. Traditionally, gold is used as a hedge against risk.
Broad equity markets finished the week mixed, failing to deviate much from the prior week. As 2020 gets into full swing, investors hope to build on remarkable 2019 returns.
S&P sectors were mostly negative this week. Industrials and energy led the positive sectors returning 1.14% and 0.84% respectively. Materials and utilities declined the most, returning -2.84% and -1.27% respectively. Industrials have jumped into the lead first YTD, returning 1.69% so far in 2020.
Commodities rose this week, driven by gains in oil and gold but restrained somewhat by natural gas. Oil markets have been highly volatile, with investors focusing on geopolitical tension and global demand concerns. Recent tensions between the U.S. and Iran have caused oil futures to spike, as traders fear that an escalation could lead to supply disruptions.
Gold climbed significantly, finishing over the $1500/oz mark for the second consecutive week. Global growth concerns and geopolitical tension seem to be the driving factors behind gold’s ascent.
The 10-year Treasury yields fell from 1.88% to 1.79% while traditional bond indices rose. Treasury yields fell as geopolitical tensions soared, driving investors to safe havens. The 10-2 year yield spreads tightened. Treasury yields will continue to be a focus as analysts watch for signs of changing market conditions.
High-yield bond yields fell slightly again over the week, maintaining the recent trends. High yield bond yields did not fall as much as treasury yields however, causing spreads to loosen for the second week. High-yield bonds are likely to remain volatile in the short to intermediate term as the Fed has taken a neutral monetary stance and investors weigh risk factors, likely driving increased volatility.
Lesson to be Learned
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.
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 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 26.26, forecasting further economic growth and not warning of a recession at this time. The Bull/Bear indicator is currently 100% bullish – 0% 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
It will likely be an interesting week as global markets attempt to digest the rising tensions between the U.S. and Iran. Trading volumes will likely rebound from the holidays and volatility is likely to increase.