Equities Gain While Uncertainty Remains

WEEKLY MARKET UPDATE – February 19, 2020

Markets gained this week as news surrounding the Coronavirus shifted from the virus spreading to controlling the outbreak. Real estate led the S&P sectors this week, finishing ahead of consumer discretionary and utilities to round out the strongest sectors. Markets are still closely monitoring developments regarding the spread of the Coronavirus. New cases seem to be in decline, but public anxiety remains as some experts fear that the spread of the virus may continue.

European indices mostly rose this week, with all major indices except for the UK’s benchmark index returning positive results. Japanese equities returned negative performance, reversing last week’s trend. World indices are experiencing elevated volatility in light of the spread of the Coronavirus.

Markets recovered this week, with most 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

Gaps between large cap growth and large cap value indices have reached new highs. The cause for this can be laid at the feet of the energy sector, which is drastically underperforming all other sectors and holds little weight in growth indices.

Market Update

Equities

Broad market equity indices finished the week positive, with major large-cap indices performing comparably to small-cap. Recent fears did not weigh on equities this week, as prices recovered after declining significantly in prior weeks.

S&P sectors were all positive this week, with not a single sector returning negative performance. Real estate and consumer discretionary led the positive sectors returning 4.81% and 2.61% respectively. Energy and financials underperformed the most, gaining 0.31% and 0.72% respectively. Technology has the lead so far YTD, returning 11.00% in 2020.

Commodities

Commodities rose this week, driven by gains 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 in recent weeks.

Gold rose 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 negligibly to remain at 1.58% while traditional bond indices rose. Treasury yields rose little as investors temper their fears of the prospect of a 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 widen. 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

“The wise man bridges the gap by laying out the path by means of which he can get from where he is to where he wants to go.”

-J.P. Morgan

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 23.91, 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

The economic calendar is lighter on high impact events this week, but prices could still be dominated by developments surrounding the Coronavirus. This week sees updated building permit information as well as manufacturing PMI. Fed minutes on the most recent FOMC meeting will also be released.

More to come soon. Stay tuned.