July 25, 2017
I am happy to present this week’s market commentary from FormulaFolio Investments. The goal is to give our clients and friends a simple way to see everything they need to know about the financial markets on a weekly basis, in 5 minutes or less. After all, investing should be simple, not complicated.
Market Update
Equities: Broad equity markets finished the week mostly positive with small-cap stocks experiencing the largest gains. S&P 500 sectors finished the week mixed as defensive sectors generally outperformed cyclical sectors.
So far in 2017 technology, healthcare, and consumer discretionary are the strongest performers while energy and telecommunications are the only sectors with negative performance year-to-date.
Commodities: Commodities were negative for week as oil prices fell 1.65%. Oil prices have experienced a high level of volatility recently as the positive effects of strengthening demand has been conflicting with the negative effects of high global supply. Gold prices rose 2.23%, marking the second consecutive week of strong gains. Gold had faced some recent downward pressure, but investors continue to have doubts about further near-term rate hikes, adding support to gold.
Bonds: The 10-year treasury yield fell from 2.33% to 2.24%, resulting in positive performance for treasury and aggregate bonds.
High-yield bonds were positive as interest rates fell and most riskier asset classes performed well for the week.
Indices are mostly positive for 2017, with equity markets leading the way while commodities and bonds lag behind.
Lesson to be learned: “To be a successful business owner and investor, you have to be emotionally neutral to winning and losing. Winning and losing are just part of the game.” – Rich Dad. Many investors allow emotions to guide their investment decision making process, but the most successful investors are able to take emotions out of the equation. By sticking to a disciplined investment strategy you can minimize the effect that emotions can have on your portfolio, improving your chances for long-term portfolio success.
FFI Indicators
FormulaFolios 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 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 23.43, forecasting further economic growth and not warning of a recession at this time. The Bull/Bear indicator is currently 100% bullish. This means our models believe there is a slightly higher than average likelihood of stock market increases in the near term (within the next 18 months).
Weekly Comments & Charts
The S&P 500 finished the week positive and remains firmly in the upward trend that began in mid-February 2016. Though the current rally has slowed slightly in recent months, short and intermediate-term momentum remains positive as many indices have reached new all time highs multiple times this year, illustrating there may still be further gains ahead. The coming weeks should continue to provide valuable insight about the near-term direction of the S&P 500, but it seems to remain in a bullish pattern for now.
Broad equity markets finished the week mostly positive as stock market volatility remained historically low.
The CBOE Volatility Index (VIX) closed below 10 for a record seventh straight day on Friday. Further illustrating the historically low volatility environment we are currently in, the VIX ended the week at a level of 9.36 which is the lowest reading for the Index since December 27, 1993. As volatility continues to be suppressed, US stocks markets continue to climb higher.
The S&P 500 has been increasing with virtually no drawdowns for over a year, as the Index has not experienced a 5% decline from a prior high-water mark since June 27, 2016. This is now the fourth longest streak in history without a 5% correction for the S&P 500 (269 trading days). However, this does not mean markets will continue to go up with now downside risk forever.
Volatility is expected to remain somewhat low for the near-term, but increases from current levels would not be unreasonable to expect as markets normalize. With the recent string of positive market movements, it can be easy for investors to forget that corrections of 5-10% are a normal market occurrence and can actually be healthy in the long-term.
While the economy seems stable at the moment, it is important to include a broad range of asset classes in your portfolio for more consistent and more stable longer-term results. Individual stocks, sectors, and indices can go from periods of over-performance to under-performance without a moments notice. It is crucial not to chase returns just because a stock is “hot” at the moment.
As investors, we need to stay committed to our long-term financial goals. All the short-term news and market movements can be the most debilitating of all when it comes to making sound investment decisions; especially if we allow them to influence knee-jerk decisions.
More to come soon. Stay tuned.