September 15, 2020
Stocks fell this week during a four day market week. Markets have trended down the last two weeks after having just set new all time highs. Economic data was sparse this week, but CPI numbers and weekly unemployment claims indicated economic health is likely still moving in a positive direction. While economic health may be slowly improving, unemployment claims are likely to remain elevated for several more weeks. Encouragingly, the unemployment rate has now dropped below the peak of the great recession during 2008-2009. The persistently high case rates of COVID-19 in the U.S. remains concerning, but infection rates seem to be slowly but steadily decreasing. It is becoming increasingly unlikely that Congress will pass a second round of stimulus. The Democrat controlled House and Republican controlled Senate have not been able to make significant progress towards a deal and expectations are now for a stimulus package to be passed after the November elections.
Overseas, developed markets rose while emerging markets fell. European indices returned mostly positive results for the week. Japanese equities also returned positive 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 fell 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 S&P 500 now has more than 50% of its value concentrated in the technology, communications, and consumer-discretionary sectors. Apple and Microsoft are helping propel technology, Alphabet and Facebook are helping drive communications, and Amazon is supporting consumer discretionary.
Broad market equity indices finished the week down, with major large cap indices performing comparably to 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 mostly negative results this week, as only materials returned positive results. Materials and industrials returned 0.82% and -0.30% respectively. Technology and energy performed the worst, posting -4.36% and -6.43% respectively. Technology leads the pack so far YTD, returning 23.14% in 2020.
Commodities fell this week, driven by falling energy 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 markets reacted to COVID-19 data and 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 declined this week from 0.72% to 0.67 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 fell this week, causing spreads to loosen. 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 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 releases. New consumer sentiment and retail sales numbers as well as Fed press conference and rate decision will be released this week, analysts will be looking for continued positive momentum as well as continuing dovish language from the Fed.