Stocks rose last week in response to encouraging economic data. While new cases of COVID-19 have caused some
states to begin restricting activities again, undeniably strong data seemed to win out in markets.
Manufacturing, housing, and hiring all returned results beating expectations, propelling equities to finish
the week in the positive. Hiring and manufacturing specifically have encouraged investors, as they tend to be
very reliable economic indicators. Both areas have a long way to go to recover lost ground resulting from the
pandemic, but the pace of recovery so far has exceeded analyst expectations.
Markets will likely be fixated first and foremost on the rate of recovery and any risks that pose a threat to
its trajectory. Risks are obviously still prevalent, and the economy has certainly not reached a point of
stability. Tensions with China continue to be an unknown 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 opening process in the southern U.S. remains highly
concerning, as infections are on the rise regionally. 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 also rose, as encouraging U.S. data lifted equities. All major European indices returned
positive results for the week. Japanese equities returned negative performance, bucking the trend of other
developed economies. 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
rose last week, with most equity indices bringing in positive 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
Expectations of unemployed Americans appear to be worsening. While still favorable compared to past spikes in
unemployment, the number of workers who do not expect their layoffs to be temporary is increasing.
Market Update
Equities
Broad market equity indices finished the week up, with major large cap indices performing comparably to small
cap. Economic data has continued to impress, but the global recovery still has a long way to go to regain lost
jobs and output. S&P sectors returned mostly positive results, as broad market movements showed investors
buying most sectors. Materials led the best performing sectors, followed by utilities, returning 4.02% and
3.78% respectively. Energy and financials performed the worst for the second consecutive week, posting -1.37%
and -2.83% respectively. Technology leads the pack so far YTD, returning 14.91% in 2020.
Commodities
Commodities rose last week, driven by gains in oil, gold, and natural gas. Oil markets have been highly
volatile, with 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 as markets reacted to increasing COVID-19 infections
and encouraging economic numbers. 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 rose from 0.64% to 0.67% while traditional bond indices rose. Treasury yield
movements reflected an improvement in 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 last 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 individual investor should act consistently as an investor and not as a speculator."
- Ben Graham
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.
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 the scale of 1 to 100. For the US Equity Bull/Bear indicator, we
want it to read least 66.67% bullish. When those two things occur, our research shows market performance is
strongest and least volatile.
The Recession Probability Index (RPI) has a current reading of 72.72, 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).
The Week Ahead
This week will have fewer high impact economic releases. Investors will be hoping to see further decline in
U.S. unemployment claims and increases in the producer price index. More to come soon. Stay tuned.