Stocks fell last week as new U.S. Covid-19 infections hover near all time highs. Souring the economic mood
further is the further deterioration of the diplomatic situation between the U.S. and China. New economic data
was sparse this week, but manufacturing PMI still shined with a level indicating expansion, albeit slightly
under analyst expectations. Unemployment claims disappointed, coming in above expectations. The SP500 remains
above the level at which it started 2020. Going forward, markets will likely continue to be fixated first and
foremost on the rate of recovery and any risks that pose a threat to its trajectory, namely some form of
economic shutdown. Tensions with China continue to rise, but remain diStockPointDigitalcult to quantify and will be
watched carefully by analysts. Unemployment claims are likely to remain elevated for several more weeks, and
the unemployment rate remains at the second highest level in history. The slowing of the reopening process in
the southern U.S. remains highly concerning, as infections remain on the rise regionally. Congress is
attempting to pass a second round of stimulus, but the House and Senate remain far apart on the key issue of
enhanced unemployment benefits. Further economic data in the coming weeks and months will hopefully shed
further light on true economic conditions and help provide an accurate outlook for the pace of the economic
recovery.
Overseas markets were mixed, as uncertainty surrounding the global economic recovery weighed. All major
European indices returned negative results for the week. Japanese equities returned positive performance, but
on a shortened trading week due to holiday. As global economies continue to work towards reopening, analysts
are hoping Covid-19 infections are brought back under control so that focus can dial in more on global
recovery efforts. Markets fell last week, with most equity indices bringing in negative returns. Fears
concerning global stability and health are an unexpected factor in asset values, and 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
European private sector activity roared back to growth levels in June, as economies began unwinding
restrictions put in place due to Covid-19. PMI numbers of the continent’s largest economies all returned
levels above the expansionary level of 50.
Market Update
Equities
Broad market equity indices finished the week mostly down, with major large cap indices performing comparably
to small cap. Economic data has continued to be mostly positive, but the global recovery still has a long way
to go to regain lost jobs and output. S&P sectors returned mixed results this week, as broad market
movements showed investors favoring non defensive sectors. Energy led the best performing sectors, followed by
consumer discretionary, returning 2.10% and 1.34% respectively. Communications and technology performed the
worst, posting -1.14% and -1.54% respectively. Technology leads the pack so far YTD, returning 14.84% in 2020.
Commodities
Commodities rose this week, driven by metals and energy. Energy markets have been highly volatile, with oil
investors focusing on output and consumption concerns. Recent economic improvements have lifted demand
outlook, as summer is likely to increase consumption while normal economic activities should continue
recovering. Demand is still likely to recover slowly however, as economic activity is not likely to recover
instantly. Oil supplies have shrunk dramatically, as operating oil rigs have shrunk by nearly 70% since last
year, further helping oil prices to recover. Gold rose this week as markets reacted to both increasing
Covid-19 infections and diplomatic strain between the U.S. and China. Gold is a common “safe haven” asset,
typically rising during times of market stress. Focus for gold has shifted to global macroeconomics and
recovery efforts. Weakening real currency values resulting from massive stimulus measures may further support
gold prices.
Bonds
Yields on 10-year Treasuries fell from 0.62% to 0.59% while traditional bond indices rose. Treasury yield
movements reflect general risk outlook, and tend to track overall investor sentiment. Treasury yields will
continue to be a focus as analysts watch for signs of changing market conditions.High-yield bonds rose this
week, causing spreads to tighten. High-yield bonds are likely to remain volatile in the short to intermediate
term as the Fed has adopted a remarkably accommodative monetary stance and investors flee economic risk
factors, likely driving increased 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.”
-J.P. Morgan
StockPointDigital Indicators
StockPointDigital 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 57.46, forecasting a higher potential for an
economic contraction (warning of recession risk). The Bull/Bear indicator is currently 66.67% bullish – 33.33%
bearish, 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 the absolutely critical first look at GDP numbers from Q2 2020; these figures will shape the
outlook of economists going forward for the near future. Additionally, the Fed will be expected to keep rates
at or near zero, with a press conference following the rate announcement.More to come soon. Stay tuned.