US equities jumped this week as the cost of oil fell. Economic indicators revealed an economy still running hot, with retail sales and manufacturing indicators all showing growth. The biggest news came from the Fed, as the FOMC voted to raise rates by 0.25%, in line with analyst expectations. This marks the first rate hike in over three years, and the beginning of a more hawkish approach by the Fed. In spite of the economic developments here at home, all eyes remain fixed on the Russian invasion of Ukraine and its possible outcomes. While war is never a welcome headline, the primary risk to the US economy right now remains inflation. Time will tell whether the Fed is doing too little too late on inflation, but their willingness to act late is better than continuing to invoke that inflation is “transitory.” Overall, the economy is still recovering well from pandemic lockdowns. The biggest threat to the economy remains inflation, and the Fed now appears to be taking the threat more seriously.
Overseas, developed markets outperformed emerging markets, with both indices returning positive performance. European indices were positive while Japanese markets returned positive as well. Improving prospects against the pandemic as well as improved prospects for economic recovery should continue to help lift markets globally over time, but conflict in eastern Europe as well as macroeconomic factors such as inflation and supply shortages continue to pose challenges.
Equity markets were positive this week as investors continue to assess the state of the global economy. While fears concerning global conflict are present for many people, 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 struggle to gain traction, other asset classes such as gold, REITs, and US Treasury bonds can prove 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
Open interest in the futures market may be signaling a shift for oil prices in the near future. Long positions appear to be on the decline, indicating that oil prices may be starting to stabilize.
Broad market equity indices finished the week up with major large cap indices outperforming small cap. Economic data has been mostly encouraging, but the global recovery still has a long way to go to recover from COVID-19 lockdowns.
S&P sectors were mostly positive this week. Consumer discretionary and technology outperformed, returning 9.27% and 7.87% respectively. Utilities and energy underperformed, posting 0.52% and 3.58% respectively. Energy holds the lead YTD, posting 32.42%.
Oil fell this week as crude oil inventories rose. Demand is still down compared to early 2020, but as global economies are continuing to recover from the pandemic lockdowns era, oil consumption is continually recovering. 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.
The primary source of volatility for the oil sector is and is likely to continue to be the Ukraine-Russia conflict. Western sanctions could put upward pressure on oil and gas prices.
Gold fell this week even 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. A new source of volatility will likely continue to be the conflict in Ukraine, as conflict may push investors into safe havens.
Yields on 10-year Treasuries rose this week from 1.9917 to 2.1494 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 have stabilized for the short term as the Fed has maintained an accommodative monetary stance and major economic risk factors subside, likely helping stabilize volatility.
A headwind could be on the horizon for fixed income assets, as the Fed has finished its asset purchases which will lower resistance on yields. Tapering will undoubtedly have an impact on yields, but the degree of impact is uncertain. In addition to asset tapering, the Fed is currently projected to raise interest rates multiple times in 2022 starting in March, adding additional interest rate risk to fixed income assets.
Lesson to be Learned
The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want 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 31.05, forecasting a lower potential for an economic contraction (warning of recession risk). The Bull/Bear indicator is currently 33% bullish, meaning the indicator shows there is a slightly lower 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 see updates to PMI readings as well as consumer sentiment and durable goods orders.
More to come soon. Stay tuned.