Investment Market Update

On a Shortened Week: July 7, 2020

Stocks rose last week in response to encouraging economic data. While new cases of COVID-19 have caused some states to begin restricting activities again, undeniably strong data seemed to win out in markets. Manufacturing, housing, and hiring all returned results beating expectations, propelling equities to finish the week in the positive. Hiring and manufacturing specifically have 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. However, the pace of recovery so far has exceeded analyst expectations. 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 present 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

Overseas markets also rose, as encouraging U.S. data lifted equities. All major European indices returned positive results for the week. Japanese equities returned negative performance, bucking the trend of other developed economies. 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 last 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 unemployed Americans appear to be worsening. While still favorable compared to past spikes in unemployment, the number of workers who do not expect their layoffs to be temporary is increasing.

Equities

Broad market equity indices finished the week up, with major large cap indices performing comparably to 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, 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 last week, driven by gains in oil, gold, and natural gas. 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 as markets reacted to increasing COVID-19 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 rose from 0.64% to 0.67% while traditional bond indices rose. Treasury yield movements reflected an improvement in 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 last 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.

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 72.72, 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 fewer high impact economic releases. Investors will be hoping to see further decline in U.S. unemployment claims and increases in the producer price index.

See last week’s Investment Update.

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