Investors Turn Fearful As Virus Spreads
WEEKLY MARKET UPDATE – February 25, 2020
WEEKLY MARKET UPDATE – February 25, 2020
Markets dropped this week as governments around the globe struggle to contain the spread of the Coronavirus. Real estate led the S&P sectors this week for the second consecutive week, finishing ahead of consumer staples and utilities to round out the strongest sectors. Markets are still closely monitoring developments regarding the spread of the Coronavirus, but hopes that new cases are in decline are turning increasingly dim. Public anxiety remains as the virus continues to spread, adding pressure to markets and global supply chains as both consumers and workers are staying home.
European indices declined this week, with all major indices returning negative results. Japanese equities also returned negative performance, continuing last week’s trend. World indices are experiencing elevated volatility in light of the spread of the Coronavirus.
Markets retreated this week, with most major equity indices bringing in 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.
Chart of the Week
Yields have been under renewed pressure following disappointing economic data and virus fears. 30-year treasury yields have hit all-time lows as investors look for cover from global uncertainty.
Broad market equity indices finished the week negative, with major large-cap indices underperforming small-cap. Recent fears weighed on equities this week, as prices declined in response to global economic concerns and the further spread of the coronavirus.
No S&P sectors returned positive results this week, only real estate returned neutral performance. Real estate and consumer staples led the best performing sectors returning 0.00% and -0.12% respectively. Technology and financials underperformed the most, losing -2.53% and -1.26% respectively. Utilities have regained the lead so far YTD, returning 8.32% in 2020.
Commodities rose this week, driven by gains in gold, oil, 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 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 significantly this week as fear surrounding the Coronavirus increased. The focus for gold has shifted to global growth and public health concerns, as geopolitical tensions seem to be fading from investor focus.
The 10-year Treasury yields dropped considerably to 1.47% from 1.58% while traditional bond indices rose. Treasury yields fell as investors try to protect against the prospect of a global virus outbreak. The 10-2 year yield spreads tightened considerably. 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 individual investor should act consistently as an investor and not as a speculator.”
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 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 will likely be dominated by developments surrounding the Coronavirus. This week sees updated consumer confidence information as well as durable goods orders. Core PCE price index numbers (the Fed’s preferred inflation measure) will also be released.
More to come soon. Stay tuned.
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