Equities Rebound in Spite of Virus Fears

WEEKLY MARKET UPDATE – February 11, 2020

Markets recovered this week as fears surrounding the impact of the Coronavirus receded. Technology led the S&P sectors for the third consecutive week, finishing ahead of materials and health care to round out the strongest sectors. Markets are still anxiously awaiting developments regarding the spread of the Coronavirus. New cases have sprung up around the world, fueling public anxiety as some experts fear that the spread of the virus may continue.

European indices rose significantly this week, with all major indices returning positive results. Japanese equities returned positive performance as well, reversing last week’s trend. World indices are experiencing elevated volatility in light of the spread of the Coronavirus.

Markets recovered this week, with 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

Commodities remain under pressure in an increasingly challenging macroeconomic environment. Fears that slow economic growth worldwide may be under additional pressure from the Coronavirus have accelerated downward price movements.

Market Update

Equities

Broad equity markets finished the week positive, with major large-cap indices outperforming small-cap. Recent fears did not weigh on equities this week, as broad market indices have recovered somewhat after declining significantly in prior weeks.

S&P sectors were mostly positive this week, with only one sector returning negative performance. Technology and materials led the positive sectors returning 4.47% and 4.22% respectively. Utilities and energy underperformed the most, falling -0.63% and gaining 0.76% respectively. Technology now has the lead so far YTD, returning 8.54% in 2020.

Commodities

Commodities declined again this week, driven by losses in oil. Oil markets have been highly volatile, with investors focusing on geopolitical tension and global demand concerns. Global concerns surrounding the virus outbreak have further stoked demand concerns, as a significant impact on energy demand is expected as a result. Weakened demand in an already challenging global market has driven oil to nearly 6-month lows.

Gold declined slightly this week as fear surrounding the Coronavirus receded slightly. The focus for gold has shifted to global growth and public health concerns, as geopolitical tensions seem to be fading from investor focus.

Bonds

The 10-year Treasury yields rose from 1.51% to 1.58% while traditional bond indices fell. Treasury yields rose as investors tempered their fears of the global virus outbreak. The 10-2 year yield spreads tightened slightly. Treasury yields will continue to be a focus as analysts watch for signs of changing market conditions.

High-yield bonds rose slightly over the week, causing spreads to tighten. 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

“Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return.”

-Warren Buffet

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 Indicators

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 the strongest and least volatile.

The Recession Probability Index (RPI) has a current reading of 24.04, 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 be a revealing week as the economic calendar is heavy on high impact events, but could still be dominated by developments surrounding the Coronavirus. Retail sales and CPI data releases will likely be unable to outweigh sentiments surrounding the spread of the virus. One potential x-factor for the week will be Fed Chair Powell, who will be testifying before congress midweek.

More to come soon. Stay tuned.