Markets Climb on Economic Data

WEEKLY MARKET UPDATE – May 26, 2020

Markets rose this week as several indicators returned better-than-expected economic data. U.S. states have continued to permit further non-essential business openings in spite of Covid-19, helping to support broader optimism. Equities finished the week up after PMI numbers, building permits, and oil inventories all beat expectations. Industrials led the S&P sectors this week, finishing ahead of energy and real estate to round out the strongest sectors. Analysts will likely continue to observe production and consumption adjustments made by market participants closely after shutdowns begin to wind down. Tensions with China continue to be unknown and will likely remain in focus. Unemployment is likely to remain elevated for several more weeks, 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 also rose. European countries have begun eyeing reopening their economies similar to the U.S., and investors were encouraged by improving outlooks. All major European indices returned positive results. Japanese equities returned positive performance as well. After doing better than most developed countries initially, Japan started to experience more widespread outbreaks, prompting an official state of emergency. Since the declaration of emergency, cases have dropped dramatically. 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 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

Value stocks continue to lag growth stocks on a global scale. While there has been a clear downtrend during the last decade, market reactions to the Covid-19 pandemic appear to be exacerbating the gap.

Equities

Broad market equity indices finished the week up, with major large-cap indices underperforming small-cap. Economic data mostly came in above expectations this week and the first steps needed to see leveling out are being taken, as multiple U.S. states have reopened their economies and more are poised to do the same this month.

S&P sectors returned almost unanimously positive results this week, as broad market movements showed investors buying into almost all sectors. Industrials led the best performing sectors, followed by energy, returning 7.2% and 6.11% respectively. Consumer staples and healthcare performed the worst, posting 0.25% and -0.78% respectively. Technology leads the pack so far YTD, returning 5.17% in 2020.

Commodities

Commodities rose this week, driven by large gains in oil and natural gas. Oil markets have been highly volatile, with investors focusing on output and consumption 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 likely to recover slowly, as countries around the globe have begun re-opening their economies. Oil supplies have shrunk, helping oil prices to recover.

Gold fell slightly this week as markets reacted to information surrounding Covid-19 and global trade. Gold is a common “safe haven” asset, typically rising during times of market stress. The 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.

Bonds

Yields on 10-year Treasuries rose from 0.64% to 0.66% while traditional bond indices rose. Treasury yields rose as efforts to contain the spread of Covid-19 seem to have helped blunt the spread of the disease, and investors reacted favorably to surprise expectations beats on economic data. Treasury yields will continue to be a focus as analysts watch for signs of changing market conditions.

High-yield bonds rose 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

“Investors should purchase stocks like they purchase groceries, not like they purchase perfume.”

-Ben Graham

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 69.42, forecasting a higher potential for an economic contraction (warning of recession risk). 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

This week sees the first GDP estimate to come out for Q1. This is likely to be a very high impact event, as economists and investors alike will likely project Q2 growth off of the Q1 numbers. The extent to which the Covid-19 pandemic damaged product will be on full display.

More to come soon. Stay tuned.