Equity markets fell this week as the producer price index came in well above expectations Friday, possibly helping to drive an end-of-week sell-off. Inflation has been a nuisance to markets for most of 2021, with all observed inflation measurements showing readings well above the 2% Fed target. Volatility movements reflected the market conditions for the week, as the VIX “fear” index spiked almost 24%. One bright spot for the week was unemployment claims, which beat expectations to set a new pandemic/recovery era low.
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, high COVID infections also risk slowing economic progress.Overseas, developed markets outperformed emerging markets, with both indices returning negative performance. European indices were negative, 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 negative 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
Hurricane Ida managed to shut down all of the oil rigs in the Gulf of Mexico, with production now slowly resuming in the region. The shutdown could have an impact on oil and gasoline prices, but likely only temporarily.
Broad market equity indices finished the week down, with major large cap indices outperforming 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 negative this week. Consumer discretionary and communications outperformed, returning -0.33% and -1.20% respectively. Healthcare and real estate underperformed, posting -2.73% and -3.89% respectively. Real estate remains in the lead in 2021 with a 28.35% return.
Oil rose slightly this week even as crude oil inventories shrunk less 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 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.
Yields on 10-year Treasuries rose this week from 1.3223 to 1.3411 while traditional bond indices rose slightly. 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 loosened slightly. 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. A potential headwind could be on the horizon, as the Fed has expressed that asset tapering could take place in 2021, which could raise yields.
Lesson to be Learned
"The stock market is filled with individuals who know the price of everything, but the value of nothing.”
– Phillip Fisher
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 sees multiple high impact economic releases, including updated CPI numbers, retail sales, industrial production, consumer sentiment, and the manufacturing indexes from both the empire state and Philly Fed.More to come soon. Stay tuned.