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, finances should be simple, not complicated.
Equities: Broad equity markets finished positive for the third straight week as the post-Brexit rally continued. Equity markets have gained between 8% to 11% since the Monday following the Brexit decision. Most major S&P 500 sectors were positive with only utilities posting negative returns.
So far in 2016 telecommunications, utilities, and energy are the strongest performers while financials is the only sector with negative performance.
Commodities: Commodities were moderately positive as oil gained 1.19%, recovering a portion of the 7.31% losses experienced in the previous week. Gold fell 2.22%, snapping a streak of 6 straight weeks of gains.
Bonds: The 10-year treasury yield rose for the first time in seven weeks, increasing from 1.37% to 1.60%. Increasing rates led to negative performance in treasury and corporate bonds.
High yield bonds were slightly positive as an increase in interest rates somewhat offset gains as money flowed into riskier, higher yielding assets.
Most indices remain positive (modestly) for 2016, with high yield bonds leading the way.
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.
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 increased from 25.33 to 29.8, which signaled a slightly negative shift in the US Economy (though overall the index remains positive). 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 remain neutral regarding the stock market direction in the near term (think <18 months).
Weekly Comments & Charts
The S&P 500 increased for the third straight week and finally reached a new all time high level. Equity markets as a whole have seen strong performance since the Brexit decision, which has helped push the S&P 500 past the resistance level set back in May 2015. Though this can be seen as an optimistic sign for the markets moving forward, it will be important over the next few weeks to see if the markets continue this positive momentum. The coming weeks should give some valuable insight about whether the S&P 500 will turn the old level of resistance into a level of support or if the markets pull back again and retreat into the sideways/downward trading pattern.
US equity markets have seen significant gains over the past few weeks as initial fears over the Brexit decision have eased and the US has recently reported some stronger than expected economic data. Adding to the recent bullish sentiment, increasing global challenges in regions such as Asia and Europe have actually increased investor risk tolerance for the time being as the likelihood of additional stimulus around the world continues to grow. Equity markets may seem as if it is smooth sailing ahead for now, but this is not necessarily the case.
Q2 2016 earnings season is just beginning, which will be something to keep an eye on as companies report their numbers. Earnings have been in a negative trend since the beginning of 2015, and when earnings decline it puts downward pressure on equities. Economic fundamentals and earnings growth ultimately drive equity prices in the long-run, and if companies do not produce positive & consistent earnings over time investors will choose to sell the companies’ stocks which will in turn send prices lower. The perception of continued stimulus around the world may add some upward pressure to the markets in the short-term, but global growth uncertainty will continue to be a long-term headwind until stronger, more consistent economic data and earnings growth returns.
While market trends and history are useful for study, there’s always more to investing than just the charts and trends. We need to be a little cautious about 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.