The Start of Spring

WEEKLY MARKET UPDATE – March 29, 2021

Markets were mixed this week as unemployment claims fell, inflation was steady, and Q4 GDP was revised upward to 4.3%. Durable goods orders and new home sales disappointed, but the extreme weather conditions in the southern U.S. in February caused extreme disruption in both sectors, likely meaning that the effects will be temporary. Overall, manufacturing and housing both continue to show expansionary readings, but headwinds continue to pose a challenge for both industries as costs for materials and prices paid for inputs continue to rise. 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 higher this week, with 7 day moving averages increasing by around 6K a day over the prior week. 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 mostly positive, while Japanese markets declined. Improving prospects against the pandemic as well as improved prospects for economic 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

Even a weakened dollar has been unable to prevent the widening trade deficit. With pandemic restrictions likely easing in the foreseeable future, exporting industries will hopefully be able to start recovering the exports lost in 2020.

Market Update

Equities

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

S&P sectors returned mostly positive results this week. Real estate and consumer staples outperformed, returning 4.23% and 3.90% respectively. Consumer discretionary and communications underperformed, posting -0.21% and -1.88% respectively. Energy maintains its lead in 2021 with a 33.21% return.

Commodities

Oil fell again this week as crude oil inventories increased for the fifth 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 fell this week 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.

Bonds

Yields on 10-year Treasuries fell this week from 1.7210 to 1.676 while traditional bond indices rose. 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 rose this week as spreads tightened. 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

“Know what you own, and know why you own it.”

-Peter Lynch

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 non-farm payrolls and unemployment rates. Fresh employment data is expected to be encouraging as pandemic restrictions have continued loosening.

More to come soon. Stay tuned.