The Market Rollercoaster Continues
Markets jumped this week as the novel coronavirus Covid-19 continued its spread, as shutdowns and quarantines remained in place around most of the globe. Equities have been on a wild trajectory with large price swings as investors still seem unable to determine a steady value for stocks. Sectors diverged widely from each other for the second consecutive week. Real estate led the S&P sectors this week, finishing ahead of materials and financials to round out the strongest sectors. Investors are constantly adjusting to new information, creating an environment with dramatic price fluctuations. Even as unemployment hit new all time highs and public anxiety remained, markets still found a way to ascend. Supply chains, store-front businesses, and consumer activity remain under pressure. Two recent positive developments could prove vital to the global economic health, the first being new testing technology to help diagnose and isolate those infected with the disease, the second being antibody testing to determine who has already had the disease. The widespread dissemination of these tests could help make the case for opening the economy back up.
Overseas, markets rose less than U.S. indices, as European markets gained in light of increasing testing capacity and the agreement to an emergency funding package for European countries hit by the virus. Italy has been hit especially hard by the virus, as they have the oldest average population in Europe. Developments in Italy have been encouraging, as deaths and new infections appear to be in decline for the second consecutive week. All major European indices returned negative results. Japanese equities also returned positive performance, as investors seemed encouraged by steps being taken to curb infections. After doing better than most developed countries initially, Japan is now starting to experience more widespread outbreaks, prompting an official state of emergency. Japan has the highest percentage of “at risk” population in the world, making containment absolutely critical.
Markets rose this week, with all major 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
U.S. equities are now priced higher per share than their global counterparts by price to earnings ratios. Investors appear to be favoring U.S. equities again as the Covid-19 efforts are beginning to yield some global success.
Broad market equity indices finished the week up, with major large cap indices underperforming small cap. Optimism returned this week, as stock prices rose in response to indications that infection curves may be flattening. Economic data has been largely negative, embodied best by 6.6 million unemployment claims filed and consumer sentiment missing expectations.
S&P sectors returned exclusively positive results this week, as broad market movements showed investors buying into all sectors. Real estate and materials led the best performing sectors returning 20.3% and 17.84% respectively. Communications and consumer staples performed the worst, posting 7.53% and 5.5% respectively. Utilities now leads the pack so far YTD, returning -5.79% in 2020.
Commodities rose modestly this week, propelled by gains in gold and natural gas. Oil markets have been highly volatile, with investors focusing on geopolitical tension and global demand concerns. Global fears surrounding the virus outbreak have stoked demand concerns, as a significant impact on energy demand is expected as a result. Oil prices may get some much needed support from the supply side, as OPEC has officially agreed to output cuts.
Gold rose this week as fear surrounding the coronavirus decreased. Gold is a common “safe haven” asset, typically rising during times of market stress. Focus for gold has shifted to global macroeconomics and public health concerns. Weakening real currency values resulting from massive stimulus measures may further support gold prices.
Yields on 10-year Treasuries rose considerably to 0.72% from 0.59% while traditional bond indices rose. Treasury yields rose as the efforts to contain the spread of Covid-19 appear to be yielding results. Treasury yields will continue to be a focus as analysts watch for signs of changing market conditions.
High-yield bonds rose again 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 virus 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.
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 40.23, forecasting further economic growth and not warning of a recession at this time. However, with the unique economic circumstances caused by COVID-19, many economic indicators are expected to turn more negative as data is updated throughout the next month, which will increase the probability for a recession from the current reading. The Bull/Bear indicator is currently 0% bullish – 100% bearish, meaning the indicator shows there is a slightly higher than average likelihood of stock market decreases in the near term (within the next 18 months).
The Week Ahead
Markets continue to face the same uncertainty surrounding the coronavirus. While the infection could be in overall decline, it’s still on the rise in some places. This week’s economic calendar includes updated retail sales numbers, Philly fed manufacturing index, and new unemployment claims.