Equity markets were mixed this week as hiring data disappointed analysts. Nonfarm payrolls came in well below expectations, registering only 235K new hires against the expected 720K. Unemployment rates managed to meet expectations, coming in at 5.2%. Encouragingly, PMI data came in positive, with services meeting expectations and manufacturing exceeding expectations. Overall, the economy is well positioned to continue recovering from pandemic lockdowns, but inflation risks as well as labor challenges and limited production capacity are eating into productivity. In addition to macroeconomic factors, rising COVID infections also risk slowing economic progress.
Overseas, developed markets underperformed emerging markets, with both indices returning positive performance. European indices were mixed, while Japanese markets returned positive performance for the week. Improving prospects against the pandemic as well as improved prospects for economic recovery should continue to help lift markets globally over time.
Equity markets were mostly positive this week as investors continue to assess the state of the global economy. While fears concerning global stability and health overall 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
Speculation predicting the decline of copper prices appears to be in decline. Copper has retreated from all time highs in recent months, but hedge fund managers are positioning themselves away from short exposure to the industrial metal. Higher copper prices tend to be indicative of healthy manufacturing activity and demand, as it is a commonly used raw material.
Broad market equity indices finished the week mixed, with major large cap indices slightly underperforming small cap. Economic data has been mostly encouraging, but the global recovery has a long way to go to recover from COVID-19 lockdowns. S&P sectors were mixed this week. Real estate and healthcare outperformed, returning 3.99% and 1.70% respectively. Energy and financials underperformed, posting -1.44% and -2.48% respectively. Real estate has taken the lead in 2021 with a 33.55% return.
Oil rose slightly this week as crude oil inventories shrunk more than expected. Energy markets have been highly volatile in the COVID era, but it appears that higher oil prices may be more of the norm given recent market fundamentals. Demand is still low compared to early 2020, but as global economies are continuing to improve, oil consumption is recovering rapidly. 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 as the U.S. dollar weakened. 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 1.3070 to 1.3223 while traditional bond indices fell. Treasury yield movements reflect general risk outlook, and tend to track overall investor sentiment. Expected increases in future inflation risk have helped elevate yields since pandemic era lows in rates. 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 and major economic risk factors subside, likely helping stabilize 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.”
Brookstone 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 28.88, 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 will be light on high impact economic releases, but we will still see updated PPI numbers and a few other smaller impact economic indicators released.More to come soon. Stay tuned.