Markets Lose Energy



Markets fell this week as unemployment claims and retail sales disappointed. Manufacturing and housing both continue to show expansionary readings, but headwinds may be starting to diminish both industries as costs for materials and prices paid for inputs continue to rise quickly. Further price inflation may prove to undermine progress in these high-flying sectors; for new construction real estate in particular, soaring lumber prices are dramatically increasing costs for builders. New COVID-19 infections moved slightly lower this week, with 7 day moving averages decreasing by less than 10K a day. U.S. infections appear to be declining at a slower pace, but overall still seem to be exhibiting downward momentum.

Overseas, developed markets outperformed emerging markets. European indices were mixed, while Japanese markets rose negligibly, diverging from U.S. markets. Improving prospects against the pandemic as well as improved prospects for recovery should continue to help lift markets globally over time.

Markets were mixed this week as investors continue to assess the state of the global economy. While fears concerning global stability and health appear to be in decline, 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

Small caps continue to gain more momentum than large caps, more than in the tech-heavy Nasdaq composite index. Value, in particular, has seen a substantial resurgence, as rising interest rates seem to be causing growth stocks to be losing some of their lusters.

Market Update


Broad market equity indices finished the week down, with major large-cap indices outperforming small-cap. Economic data has been encouraging, but the global recovery has a long way to go to recover from COVID-19 lockdowns.

S&P sectors returned mostly negative results this week. Communications and healthcare outperformed, returning 0.54% and 0.37% respectively. Financials and energy underperformed, posting -1.68% and -7.66% respectively. Energy maintains its lead in 2021 with a 29.35% return.


Oil fell this week as crude oil inventories increased for the fourth consecutive week. Energy markets have been highly volatile in the COVID era, but it appears that price stability may be on the horizon given recent developments. Demand is still low compared to early 2020, but as vaccinations proliferate, lockdown restrictions in Europe, as well as the U.S., should start to loosen, helping support recovery. On the supply side, operating oil rigs are still well under early 2020 numbers, but trending upwards. In addition to supply and demand, a volatile dollar is likely to have a large impact on commodity prices.

Gold rose this week even as the U.S. dollar strengthened. Gold is a common “safe haven” asset, typically rising during times of market stress. Focus for gold has shifted again to include not just global macroeconomics surrounding COVID-19 damage and recovery efforts, but also inflation and its possible impact on U.S. dollar value.


Yields on 10-year Treasuries rose this week from 1.6247 to 1.7210 while traditional bond indices fell. Treasury yield movements reflect general risk outlook and tend to track overall investor sentiment. Most recently, expected increases in future inflation risk have helped drive up yields. Treasury yields will continue to be a focus as analysts watch for signs of changing market conditions.

High-yield bonds fell this week as spreads loosened. High-yield bonds are likely to remain more stable in the short to intermediate-term as the Fed has adopted a remarkably accommodative monetary stance, vaccines continue to be administered at high rates, and major economic risk factors subside, likely helping stabilize volatility.

Lesson to be Learned

“Spend each day trying to be a little wiser than you were when you woke up.”

– Charlie Munger

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 23.49, 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 we will see updated manufacturing and services PMI numbers, as well as core durable goods orders. On Friday, the Fed’s preferred inflation measure, the PCE index, will be released, which could provide a better perspective on where the central bank may take future rate decisions in response to inflation levels.

More to come soon. Stay tuned.

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