The Rehabilitation Begins



Markets fell marginally this week as the first wave of economic reopenings were being set to take place. Several U.S. states are permitting non-essential businesses to open in spite of the continuing Covid-19 threat. Equities have begun to taper off as investors eye the specifics of plans to reopen the U.S. economy. Most sectors finished down this week, likely reflecting some profit-taking from the previous two weeks of growth. Energy led the S&P sectors this week, finishing ahead of communications and consumer discretionary to round out the strongest sectors. This coming week could prove illuminating as Investors will be able to observe the effects of economic reopenings in the U.S. It will be the first opportunity for analysts to observe production and consumption adjustments made by market participants after shutdowns ground much of economic activity to a halt. Unemployment is likely to remain elevated for several more weeks and public anxiety remains, but economic activity is likely to begin a slow and steady return to normal in the coming weeks and months. Infection data is becoming more accurate as testing becomes more widely disseminated, helping to better assess economic options.

Overseas, markets declined slightly more than U.S. indices. European countries have begun eyeing reopening their economies similar to the U.S., likely encouraging investors. All major European indices returned negative results. Japanese equities returned negative performance as well, as investors appear nervous as infections in Japan seem to be on the rise. 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 declined 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

Inventories for durable goods have been growing at an alarming pace, reaching highs not seen since the financial crisis. Sales have slumped due to Covid-19, but as economies begin to reopen the inventory/sales ratio is likely to improve.

Market Update


Broad market equity indices finished the week mixed, with major large-cap indices underperforming small-cap. Optimism tempered this week, as stock prices mostly fell after two previous weeks of gains. Economic data is still predominantly negative, but the first steps needed to see leveling out are being taken, as multiple U.S. states will begin reopening their economies this week.

S&P sectors returned mostly negative results this week, as broad market movements showed investors selling out of most sectors. Energy and communications led the best performing sectors returning 1.67% and -0.04% respectively. Real estate and utilities performed the worst, posting -4.35% and -3.76% respectively. Healthcare leads the pack so far YTD, returning -1.66% in 2020.


Commodities fell this week, driven by large losses in oil. 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. Demand is currently so scarce that oil has had to be stored in record amounts, leading to the first-ever negative prices in oil futures. The supply side of the equation is likely to face reductions in output, as lack of storage will continue to be a problem.

Gold rose this week as talk surrounding the coronavirus has shifted. 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 dropped from 0.64% to 0.60% while traditional bond indices rose. Treasury yields fell even as the efforts to contain the spread of Covid-19 appear to be yielding results and the economy is set to gradually reopen. Treasury yields will continue to be a focus as analysts watch for signs of changing market conditions.

High-yield bonds rose slightly again this week but spreads still loosened. 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

“Finding the best person or the best organization to invest your money is one of the most important financial decisions you’ll ever make.”

-Bill Gross

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 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 of 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 have some important developments surrounding the coronavirus to process. This week will see several U.S. states reopen their economies, providing a preview for what a broad scale reopening could look like. This week’s economic calendar includes manufacturing PMI, updated GDP numbers, and new unemployment claims.

More to come soon. Stay tuned.

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