October Optimism

WEEKLY MARKET UPDATE – October 5, 2020

October Optimism

WEEKLY MARKET UPDATE – October 5, 2020

Stocks rose this week, breaking a four-week streak of losses. Economic data was mixed this week, marked by expectations miss in non-farm payrolls but also a lower than expected unemployment rate. Unemployment claims continue to trend downwards, likely indicating slowly recovering labor markets. Unfortunately, unemployment claims are likely to remain elevated for several more weeks, but will likely continue to trend downwards. The persistently high case rates of COVID-19 in the U.S. remains concerning. President Trump and members of the administration have been diagnosed with COVID-19, underscoring the persistent and infectious nature of the disease. Negotiations toward a second stimulus package have supposedly made progress, but a final deal has yet to take shape. Democrats and Republicans are still reportedly far apart on the final size of a stimulus bill. House Democrats have passed a $2.2 trillion stimulus bill, but it is DOA in the Republican-controlled Senate.

Overseas, developed markets and emerging markets both rose, following the same trends as U.S. markets. European indices returned positive results for the week, while Japanese equities returned negligibly negative performance. As global economies continue to work towards business, as usual, analysts are hoping COVID-19 infections are brought further under control so that focus can dial in more on global recovery efforts.

Markets rose this week, with most 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

The percentage of permanent job losses is rising. While still well below great recession numbers, rising permanent job losses are problematic because they are much more difficult to replace than temporary layoffs.

Market Update

Equities

Broad market equity indices finished the week up, with major large-cap indices performing comparably to small-cap. Economic data has progressed, but the global recovery still has a long way to go to regain lost jobs and output.

S&P sectors returned mostly positive results this week. Real estate and utilities outperformed, returning 4.87% and 3.31% respectively. Technology and energy performed the worst, posting 0.81% and -2.85% respectively. Technology leads the pack so far YTD, returning 25.46% in 2020.

Commodities

Commodities fell this week, driven by falling energy prices. Energy markets have been highly volatile, with oil investors focusing on output and consumption concerns. Demand is still likely to recover slowly, however, as economic activity is not likely to recover instantly from the pandemic. On the supply side, operating oil rigs are still well under the early 2020 numbers.

Gold rose this week as the precious metal gained value as the US dollar weakened. Gold is a common “safe haven” asset, typically rising during times of market stress. The focus for gold has shifted to global macroeconomics and recovery efforts.

Bonds

Yields on 10-year Treasuries rose this week from 0.65% to 0.70% while traditional bond indices fell. Treasury yield movements reflect general risk outlook and tend to track overall investor sentiment. 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 economic 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

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 typically stronger, with less volatility.

The Recession Probability Index (RPI) has a current reading of 36.71, forecasting a lower potential for an economic contraction (warning of recession risk). The Bull/Bear indicator is currently 100% bullish, 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).

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.

The Week Ahead

This week is light on major economic releases. Upcoming highlights include services PMI and updated unemployment claims.

More to come soon. Stay tuned.

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