Markets rose this week as inflation continues to tug at investor sentiment. The all important PCE deflator index (the metric that the Fed uses to measure inflation and inform monetary policy) beat expectations, revealing faster than anticipated price increases in the economy. Increasing prices are being felt by consumers, which is being reflected in the most recent consumer sentiment indicators. Economic growth data continues to look encouraging, but inflation threatens to derail progress if it continues to increase or increases too quickly. In spite of inflation risks, the economy remains well positioned to perform exceptionally in 2021 based on overall macroeconomic position. New COVID-19 infections moved substantially lower again this week, with 7 day moving averages decreasing by around 5K a day over the prior week, representing nearly a 20% reduction in infections. The most recent infection data puts the moving average in early June 2020 territory.
Overseas, developed markets underperformed emerging markets. European indices were positive, while Japanese markets also 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.
Markets were positive 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
The housing market continues to discourage home buyers, as low mortgage rates coupled with supply shortages and high demand continue to push prices through the roof. In contrast, sellers are reaping exceptional returns on their property.
Broad market equity indices finished the week positive, with major large cap indices 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 returned mixed results this week. Communications and consumer discretionary outperformed, returning 2.46% and 2.23% respectively. Healthcare and utilities underperformed, posting -0.67% and -1.58% respectively. Energy maintains its lead in 2021 with a 36.23% return.
Oil rose this week as crude oil inventories shrunk more than expected. Energy markets have been highly volatile in the COVID era, but it appears that stability may be more of the norm given recent market fundamentals. 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 as the U.S. dollar weakened slightly. 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 fell this week from 1.6216 to 1.5943 while traditional bond indices rose. Treasury yield movements reflect general risk outlook, and tend to track overall investor sentiment. Recently, expected increases in future inflation risk have helped elevate 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.”
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 11.02, 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 nonfarm payrolls and unemployment rates. Also of high interest will be manufacturing and services PMI numbers, as well as factory orders.More to come soon. Stay tuned.