5 Minute Market Commentary – June 28, 2016

Trust Dale CFGI 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, finances should be simple, not complicated.

Market Update

Equities: Broad equity markets were positive through Thursday’s close, but traded down sharply on Friday (between -3% to -9% for the day) as the U.K. voted to leave the European Union (EU). This severe sell-off caused equities to finish the week negative. Defensive sectors had the strongest weekly performance, with only telecommunications having positive performance, while cyclical sectors lagged behind.

So far in 2016 telecommunications, utilities, and energy are the strongest performers while financials, health care, technology, and consumer discretionary are the only sectors with negative performance.

Commodities: Commodities saw losses for a second straight week, lead by declines in oil and agricultural goods. Though commodities had a negative week as a whole, gold posted a 2.13% gain and reached its highest intraday level since March 2014 due to an increase in demand for safe-haven assets after the Brexit vote.

Bonds: The 10-year treasury yield fell for a fourth straight week from 1.62% to 1.57%, resulting in yields remaining at the lowest levels since August 2012 and helping treasuries and aggregate bonds to have another positive week.

High yield bonds also had a slightly positive week as a decrease in general interest rates helped overcome the negative impact of the global shift away from riskier asset classes.

Most indices remain positive (modestly) for 2016, with commodities still leading the way.

Screen Shot 2016-06-27 at 9.22.54 AM

Lesson to be learned: Emotions can be our greatest enemy when it comes to investing. Do not let emotions guide your investment decisions and lead to self-destructive behavior. Instead, maintain a smart and disciplined investment strategy to improve your chances of 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 future posts, I’ll write more about how these indicators are built and why we feel they are important.

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) most recently fell from 31.29 to 25.33, which signaled a slightly positive shift in the US Economy.  The Bull/Bear indicator is currently 33.33% bullish, 33.33% neutral, and 33.33% bearish (averaging 50% bullish and 50% bearish). This means our models believe there is no clear direction for the stock market in the near term (think <18 months).

Screen Shot 2016-06-27 at 9.23.06 AM

Weekly Comments & Charts

The S&P 500 fell for the third straight week since hitting a resistance point set by the all time high back in May 2015. It looked as if the markets were poised to test this resistance point again as of Thursday, and a breakthrough may have finally happened if the U.K. had decided not to leave the EU, but the -3.59% sell-off following the Brexit decision halted the upward momentum seen earlier in the week. If the market continues downward for the coming week(s), it is important to see if the downward trend ceiling acts as a level of support or if prices breakthrough this ceiling. For any real positive market momentum to pick back up we would like to see the ceiling act as support, which would help push prices back up again in an attempt to breakthrough the all time high level set back in May 2015. Until the markets can hit a new all time high and break through this resistance point, we will continue to trade in a sideways / downward pattern.Screen Shot 2016-06-27 at 9.22.14 AM

The Brexit decision caught markets off-guard on Friday as a majority of people expected the vote to result in a “stay in the EU” decision. This sent equity markets tumbling as global economic uncertainties increased. The initial market reaction was negative and severe, but where does this leave the global economy going forward?

It is expected that U.K. companies will see lower capital outflows due to increasing political tensions as well as increasing uncertainty surrounding the country. This would lead to a rise in unemployment and lower GDP in the world’s fifth-largest economy. Though this may be bad news for the U.K. directly, the primary fear is that this could spill over into the rest of Europe which could cause a slowdown on a more global scale. Due to the increasing global exposure of U.S. companies, a slowdown in Europe could quickly travel overseas.

As with most major events that add uncertainty to the global economy, equity markets are expected to decline in the near term as there is added downward pressure and volatility. This could persist until there is more clarity about the overall impact of the Brexit. Bond yields in general are expected to remain suppressed in the near term and money will likely flow from riskier assets (equities) to less risky assets (bonds, gold, etc.) until there is more clarity on the impact of the Brexit.

While market trends and history are useful for study, there’s always more to investing than just the charts. We need to be a little cautious about earnings (they are broadly declining), increasing global uncertainties, and the election that is right around the corner.

Most importantly, 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.

Regards,

Phil Calandra

Trust Dale CFGThe Brexit votes have been counted, the UK has decided to leave the European Union (EU), and David Cameron has stepped down as Prime Minister. According to reports the votes were geographically segregated as England and Wales were generally pro-leaving while Scotland and Ireland were generally pro-staying in the EU. The votes were also segregated across age and education demographics, with a clear trend of younger/more educated voters landing on the pro-staying side and older/less educated voters landing on the pro-leaving side.

It is clear the Brexit decision has had an immediate negative impact for the global equity markets, so why did a majority of voters (51.9%) want to leave the EU in the first place?

  • Estimates showed that the gross cost of EU membership was about £350M/wk (but the net total economic cost is closer to £136M/wk after up-front rebates and the EU spending money on the UK). Pro-leave voters argued this money could be spent better elsewhere, such as new British industries and scientific research.
  • The Common Agricultural Policy, a system of subsidies introduced in 1962 to support European farmers, is criticized as being too costly and wasteful. By leaving the EU, the UK can pursue more international trade deals with countries such as China and India rather than paying for the inefficient production of goods.
  • One of the EU’s strongest principles is the free movement of people, goods, services, and money across borders. While part the EU, the UK would have no control over immigration from other EU member states. This was creating an issue on how to regulate welfare as immigration to the UK was becoming more prominent.
  • Leaving the EU will allow the UK government more freedom to control healthcare, law, and international trade agreements.

These seem like sensible reasons for the UK to separate from the EU, but there are two sides to every story. There may be some foreseen, but unintended, consequences for the UK as well as the global economy in the coming months and years.

  • The EU is the UK’s largest trading partner, accounting for about half of all UK imports and exports. Though the UK can enter into trade agreements with EU countries the terms will likely not be as friendly as they are at the current time, resulting in lower trading activity and increased trading costs between the UK and EU.
  • Scotland is expected to hold a referendum to leave the UK. In the most recent 2014 poll, Scotland decided to remain part of the UK arguing that the UK safeguarded their future in the EU. With the recent events, many expect another poll in which Scotland could separate from the UK in order to join back with the EU.
  • The decision for the UK to leave the EU can be interpreted as a form of deglobalization and a step-down from free trade, which is a negative for both the UK and the global economy. Deglobalization will likely lead to lower GDP in the UK and could trickle over to surrounding countries as the current balance of imports and exports is interrupted. The UK is expected to go into a recession, but this could happen at a more global level as well.
  • Foreign investment into the UK is likely to slowdown as investors will be scared away due to the large levels of risk and uncertainty surrounding the Brexit decision.
  • There will be political uncertainty as the UK develops an exit plan from the EU. With the resignation of David Cameron and a new regime stepping in, there is not much clarity for the exit plan.
  • The door is now open for other countries to attempt to leave the EU. Until now, no country had ever severed their ties with the EU. There is fear that other countries could follow suit in the coming years, resulting in a breakup of the EU all together.

Only one thing is certain at the moment: there are still many uncertainties surrounding the Brexit decision and nobody knows exactly how this will all play out. Emotions and panic can cause investors to make poor decisions in times like these, which is why it is imperative to stay committed to a smart investment strategy over the long-run. By avoiding the urge to make a knee-jerk reaction to daily news, long-term success is more likely to be achieved.

Regards,

Phil Calandra

Important Market Update – 6/24/2016

Stock Market RollercoasterAs many of you may have seen or heard in the news this morning, the Brexit votes have been counted and the U.K. has decided to leave the European Union (EU). This major global development caused many markets to sharply decline Friday morning. As of this writing the NIKKEI in Japan finished the trading day down almost -8%, the FTSE 250 in London is down -7% mid-day, and the S&P 500 in the U.S. opened down -2.68%. The initial market reaction is negative and severe, but where does this leave the global economy and how are our portfolios positioned to protect our clients’ assets during these volatile and uncertain times?

Global Economic Impact

The decision for the U.K. to leave the EU raises some significant global economic concerns. It is expected that U.K. companies will see lower capital outflows due to increasing political tensions as well as increasing uncertainty surrounding the country. This would lead to a rise in unemployment and lower GDP in the world’s fifth-largest economy. Though this may be bad news for the U.K. directly, the primary fear is that this could spill over into the rest of Europe which could cause a slowdown on a more global scale. So what can we expect from the markets in the coming months?

  • As with most major events that add uncertainty to the global economy, equity markets are expected to decline in the near term as there is added downward pressure and volatility. This could persist until there is more clarity about the overall impact of the Brexit.
  • Bond yields in general are expected to remain suppressed in the near term. Money will likely flow from riskier assets (equities) to less risky assets (bonds, gold, etc.) until there is more clarity on the impact of the Brexit. As demand for bonds increases yields shift lower, thus raising bond prices.

Our Portfolios

The Brexit is a prime example of why it is important to hold a smart, diversified portfolio. Although major equity markets are severely down immediately following the decision for the U.K. to leave the EU, we believe we are well positioned in our portfolios for minimal downside exposure:

  • Tactical Growth has a 40% exposure to gold, which is currently up over 5%
  •  Flexible Growth is fully invested in U.S. Treasury ETF’s, which are up between .25% – 2.5% (depending on the length of maturity) due to the sharp decline in interest rates
  •  FFI US Equity (FFILX) has the potential to hold 50 individual stocks but is only 62% invested, therefore reducing overall equity exposure
  •  BCA is only 50% invested in high yield bonds at the moment

By keeping a non-biased, emotion-free, and consistent investment philosophy we believe our portfolios are well positioned for long term success regardless of the short-term market conditions.

5 Minute Market Commentary – June 21, 2016

Trust Dale CFGI 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, finances should be simple, not complicated.

Market Update

Equities: Broad equity markets were negative for the week as uncertainty surrounding the looming “Brexit” vote continued. The referendum that will determine whether the U.K. will remain in the European Union will be held this week on Thursday, June 23. Defensive sectors saw the strongest weekly gains, with only telecommunications and utilities having positive performance, while cyclical sectors lagged behind.

So far in 2016 telecommunications, utilities, and energy are the strongest performers while financials, health care, and technology are the only sectors with negative performance.

Commodities: Commodities saw losses for only the second time in the past 11 weeks as oil slipped more than -2%. Though commodities had a negative week as a whole, gold posted a 1.5% gain.

Bonds: The 10-year treasury yield fell for a third straight week from 1.64% to 1.62% as the Fed decided to keep rates unchanged and lowered projections for future rate hikes. Yields were as low as 1.57% intraweek which marked the lowest level since August 2012, helping treasuries and aggregate bonds to have another positive week.

Although interest rates fell slightly, the downward pressure for risky assets dragged high yield bonds lower for only the second time in the past 12 weeks. High yield bonds have seen strong performance in 2016, but they are experiencing slowly increasing default rates, which is something to keep an eye on over the coming weeks & months as economic volatility persists.

Most indices remain positive (modestly) for 2016, with commodities still leading the way.

Screen Shot 2016-06-20 at 9.19.32 AM

Lesson to be learned: Emotions can be our greatest enemy when it comes to investing. Do not let emotions guide your investment decisions and lead to self-destructive behavior. Instead, maintain a smart and disciplined investment strategy to improve your chances of 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 future posts, I’ll write more about how these indicators are built and why we feel they are important.

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) most recently fell from 31.29 to 25.33, which signaled a slightly positive shift in the US Economy.  The Bull/Bear indicator is currently 33.33% bullish, 33.33% neutral, and 33.33% bearish (averaging 50% bullish and 50% bearish). This means our models believe there is no clear direction for the stock market in the near term (think <18 months).

Screen Shot 2016-06-20 at 9.19.43 AM

Weekly Comments & Charts

The S&P 500 fell for a second straight week after recently hitting a resistance point set by the all time high back in May 2015. If the market continues downward for the coming week(s), it is important to see if the downward trend ceiling acts as a level of support or if prices breakthrough this ceiling. For any real positive market momentum to pick up we would like to see the ceiling act as support, which would help push prices up to attempt a breakthrough of the all time high level set back in May 2015. Until the markets can hit a new all time high and break through this resistance point, we will continue to trade in a sideways / downward pattern.

Screen Shot 2016-06-20 at 8.47.09 AM

The Fed decided to keep rates unchanged at the June meeting last week. Though this would generally be positive news for equity markets as lower rates tend to lead to economic expansion, the markets failed to achieve gains in the days after the announcement. There are still long-term concerns about the U.S. economy, which was made more apparent by the Fed lowering projections for future rate increases. Markets were surprised by the caution the Fed used when addressing the struggling economy. This raises a major concern among investors: The Fed has waited too long to raise rates and may be forced to cut rates again before they reach a healthy peak. Rates are still expected to go up sometime this year, but the path is expected to be slower and less severe than originally anticipated.

Adding to recent downward market pressure is the upcoming “Brexit” vote. Brexit refers to the referendum that will be held this week, on June 23, to determine whether the U.K. will remain in the European Union. Recent polls have shown that the “remain” and “leave” parties are fairly even, with “remain” holding slight edge. Due to the uncertainty surrounding this matter, markets are likely to stay on edge until the votes are counted.

While market trends and history are useful for study, there’s always more to investing than just the charts. We still need to be a little cautious about earnings (they are broadly declining), the dollar (broadly declining also, sending oil back up), and an election that is right around the corner.

Most importantly, 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.

Regards,

Phil Calandra

5 Minute Market Commentary – June 14, 2015

Trust Dale CFGI 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, finances should be simple, not complicated.

Market Update

Equities: The broad equity markets were mixed for the week with international equities lagging due to the uncertainty surrounding the looming “Brexit” vote. Broadly speaking, defensive sectors saw the strongest weekly gains while cyclical sectors lagged behind.

So far in 2016 utilities, energy, and materials are the strongest performers while financials and health care are the only sectors with negative performance.

Commodities: Commodities saw gains for a fifth straight week (making 9 of the past 10 weeks positive for commodities). Most commodity sectors such as agricultural goods, gold, and oil saw moderately positive performance.

Bonds: The 10-year treasury yield fell again from 1.71% to 1.64% as the expectation of a near-term federal rate hike continues to diminish. This marks the lowest yield level since February 2016, helping treasuries and aggregate bonds to have another positive week.

Lower overall interest rates coupled with a tightening credit spread helped high yield bonds increase for a fifth straight week (making 10 of the past 11 weeks positive for high yield bonds). Although high yield bonds have seen strong performance in 2016, they are experiencing slowly increasing default rates, which is something to keep an eye on over the coming weeks & months.

Most indices remain positive (modestly) for 2016, with commodities still leading the way.

Screen Shot 2016-06-13 at 11.38.10 AM

Lesson to be learned: Emotions can be our greatest enemy when it comes to investing. Do not let emotions guide your investment decisions and lead to self-destructive behavior. Instead, maintain a smart and disciplined investment strategy to improve your chances of 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 future posts, I’ll write more about how these indicators are built and why we feel they are important.

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) most recently fell from 31.29 to 25.33, which signaled a slightly positive shift in the US Economy.  The Bull/Bear indicator is currently 33.33% bullish, 33.33% neutral, and 33.33% bearish (averaging 50% bullish and 50% bearish). This means our models believe there is no clear direction for the stock market in the near term (think <18 months).

Screen Shot 2016-06-13 at 11.38.23 AM

Weekly Comments & Charts

The S&P 500 advanced Monday, Tuesday, and Wednesday last week, hitting fresh YTD highs. It looked like there might finally be a breakout above the all time high set back in May 2015, but after a strong start to the week stocks tumbled Thursday and Friday to end slightly negative. As the S&P 500 once again failed to make a definitive move up or down, it seems that the all time high ceiling held strong as a resistance point. For any real market momentum, we would need to see a breakthrough of the all time high level set back in May 2015. Until the markets can hit a new all time high and break through this resistance point, we will continue to trade in a sideways / downward pattern.

Screen Shot 2016-06-13 at 8.48.58 AM

There have been many market risks since the current broad equity bull market began in March 2009 (such as fear of a U.S. government shutdown and the Greece debt crisis), but headwinds seem to be picking up as we get further into this bull market. China has seen a significant drop in growth, causing concern for a global slowdown in economic activity. Uncertainty about future Fed rate hikes loom over the U.S. economy.

Though there are still many risks facing the global economy, the most recent hot topic is the upcoming “Brexit” vote. Brexit refers to the referendum that will be held on June 23 to determine whether the U.K. will remain in the European Union. Recent polls have shown that the “remain” and “leave” parties are fairly even, making the outcome uncertain. This lack of clarity will keep markets on edge until the votes are cast, but the risk does not necessarily end there.

There is still much uncertainty surrounding the situation if the U.K. does decide to leave the EU, and markets generally perform poorly when there is too much uncertainty. There could be a major adjustment phase as economic and political relationships are altered. Other countries could follow suit if the U.K. votes to exit, leaving the future of the EU unclear.

If the U.K. decides to stay in the EU, the markets will have likely dodged yet another risk, but this is something to keep an eye over the next few weeks as a decision for a U.K. exit could add downward pressure and volatility to the markets.

While market trends and history are useful for study, there’s always more to investing than just the charts. We still need to be a little cautious about earnings (they are broadly declining) and the election that is right around the corner.

Most importantly, 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.

Regards,

Phil Calandra

FormulaFolio Portfolio Recap – May 2016

In this recap, we cover the prior month and YTD performance, touch on current asset allocation of our tactical models, as well as the most up to date economic analysis of our proprietary economic model – the Recession Probability Index.

 

Warmest Regards,

Jason Wenk
Chief Investment Strategist
FormulaFolio Investments, LLC

5 Minute Market Commentary – June 7, 2016

Trust Dale CFGI 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, finances should be simple, not complicated.

Market Update

Equities: The broad equity markets were mixed during the holiday-shortened week. Defensive sectors such as utilities and health care saw the strongest weekly gains while financials and energy saw the worst losses.

So far in 2016 utilities, energy, and materials are the strongest performers while financials is the only sector with negative performance.

Commodities: Despite a negative week for oil, the largest constituent of the commodities index, commodities saw gains for a fourth straight week (making 8 of the past 9 weeks positive for commodities). This increase was primarily caused by strong performances in agricultural goods and gold.

Bonds: The 10-year treasury yield fell sharply, from 1.85% to 1.71%, due to a decrease in the expectation that the Fed might raise rates this summer after the poor May U.S. jobs report released on Friday. This helped treasuries and aggregate bonds to have a positive week.

High yield option-adjusted spreads saw an increase, but lower overall interest rates helped high yield bonds increase for a fourth straight week (making 9 of the past 10 weeks positive for high yield bonds). Although high yield bonds have seen strong performance in 2016, they are experiencing slowly increasing default rates, which is something to keep an eye on over the coming weeks & months.

Most indices remain positive (modestly) for 2016, with commodities still leading the way.

Screen Shot 2016-06-06 at 11.38.32 AM

Lesson to be learned: Emotions can be our greatest enemy when it comes to investing. Do not let emotions guide your investment decisions and lead to self-destructive behavior. Instead, maintain a smart and disciplined investment strategy to improve your chances of 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 future posts, I’ll write more about how these indicators are built and why we feel they are important.

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) fell to 25.33, which signaled a slightly positive shift in the US Economy.  The Bull/Bear indicator is currently 33.33% bullish, 33.33% neutral, and 33.33% bearish (averaging 50% bullish and 50% bearish). This means our models think there is no clear direction for the stock market in the near term (think <18 months).

Screen Shot 2016-06-06 at 1.46.50 PM

Weekly Comments & Charts

The S&P 500 was mostly flat for the week, maintaining its position above the downward trend ceiling but below the all time high level set back in May 2015. Thus, we must continue to wait and see where the market is headed as it fails to make a definitive move up or down. For any real market momentum, we would need to see a breakthrough of the all time high level set back in May 2015. Until the markets can hit a new all time high and break through this resistance point, we will continue to trade in a sideways / downward pattern.

Screen Shot 2016-06-06 at 9.48.21 AM

The equity markets largely shrugged off the most disappointing jobs report in nearly six years as the U.S. economy added only 38,000 jobs in May. This report sent a negative signal for the U.S. economy, but drove optimism that the Federal Reserve may wait longer before pursuing any near-term rate hike.

At their most recent meeting the Federal Open Market Committee stated that it may be appropriate to raise rates soon if economic growth accelerates, the labor market continues to improve, and inflation keeps moving toward the 2% goal. After the poor jobs report was released, the implied probability for a rate hike in June fell from 22% to 4%, signaling that investors as a whole believe the economy is still too weak to tighten monetary policy in the near future. Though it now seems less likely that there will be a rate hike in the upcoming summer months, the markets still anticipate that there will be at least one rate hike before the end of 2016 (with an implied probability of 70% by December). The exact month of a rate hike is not necessarily of much importance in the long-run, but the increasing speculation of when it might happen will likely add to market volatility in the coming months.

While market trends and history are useful for study, there’s always more to investing than just the charts. We still need to be a little cautious about earnings (they are broadly declining), the dollar (broadly declining also, sending oil back up), and an election that is right around the corner.

Most importantly, 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.

Regards,

Phil Calandra