(Slightly adapted from Brookstone Capital Management's most recent market update.)
Equity markets declined after discovery of a new COVID variant last Friday. Economic fundamentals were mixed, with PMI readings continuing to show expansion but coming in under expectations. The PCE deflator index came in at analyst expectations, revealing inflation that is still running too hot for comfort.
While economic progress continues its long slog toward recovery, residual effects of the pandemic lockdowns continue to plague the global economy, as shortages of everything from microprocessors to natural gas persist. Supply chains remain the number one obstacle to a more robust recovery, and they have struggled to get back on track in spite of progress against COVID-19. Overall, markets have performed well YTD, but headwinds continue to fiercely resist further progress.
Overseas, developed markets underperformed emerging markets, with both indices returning negative performance. European indices were negative, while Japanese markets finished the week with negative performance 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 macroeconomic factors such as inflation and supply shortages threaten markets everywhere.
Equity markets were 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.
Lesson to be Learned
Know what you own, and know why you own it.”
– Peter Lynch
Brookstone Indicators
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 26.96 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.
