March 29, 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 negative with small-cap stocks experiencing the largest losses. S&P 500 sectors finished the week mostly negative as defensive sectors generally outperformed cyclical sectors.
So far in 2017 technology, healthcare, and utilities are the strongest performers while energy and telecommunications are the only sectors with negative performance year-to-date.
Commodities: Commodities were negative for the week as oil prices fell 1.66%. Investor fear regarding the OPEC production cuts has increased recently, resulting in downward pressure in oil prices. Gold prices rose 1.50% for the week as gold remains moderately positive for the year.
Bonds: The 10-year treasury yield fell from 2.50% to 2.40%, resulting in gains for treasury and aggregate bonds.
High yield bonds were slightly negative as risky assets performed poorly 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: Fred Schwed Jr. once said “Speculation is an effort, probably unsuccessful, to turn a little money into a lot. Investment is an effort, which should be successful, to prevent a lot of money from becoming a little.” It can be difficult to avoid the urge of speculating about “hot” stock tips which can allegedly make you rich overnight. The truth, however, is markets often act in ways that are unforeseen. This is why it is important to maintain a smart and disciplined investment strategy while avoiding knee-jerk reactions based on daily market noise.
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 25.44, 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 negative, but remains well above the support level that was set following the breakout in July last year. Though the index has hit the pause button on the recent rally, short and intermediate-term momentum remains positive as many indices have reached new all time highs multiple times in recent weeks. The coming weeks should continue to give valuable insight about the near-term direction of the S&P 500, but it seems the sideways/downward pattern experienced from 2015 through mid-2016 has shifted to a more bullish pattern for now.
Broad US markets experienced losses last week as investors grew nervous about the lack of support regarding a proposed health care bill.
The House was set to vote on a new health care bill to replace Obamacare on Thursday, but the vote was delayed as it became apparent there was not enough support to quickly pass the bill. Though the bill itself does not mean a lot to the health of the markets in the long-term, the failure for a timely passage does create the perception of a bumpier road than initially expected for further US economic growth.
Trump has said the repeal and replacement of Obamacare is a crucial first step before too much action can be taken on his other plans – such as a major tax-reform. Markets have experienced a strong rally since Trump won the election, but the delay of the health care bill shows the development and implementation of policies and reforms moving forward may not be a completely smooth process.
This recent bout of uncertainty is a great example of why it is important to include a broad range of asset classes in your portfolio for more consistent and more stable longer-term results.
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.