5-Minute Market Update | September 26, 2016
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 week with international stocks experiencing the largest gains. All S&P 500 sectors finished the week positive with defensive sectors generally outperforming cyclical sectors.
So far in 2016 utilities, telecommunications, and energy are the strongest performers; no sectors currently have negative performance year-to-date.
Commodities: Commodities were positive for the week as oil gained 3.37%. Oil continues bounce around the $40 – $50/bbl level experienced since April as there is no clear direction for prices at the moment. Gold increased 2.40% and remains considerably positive for the year.
Bonds: The 10-year treasury yield decreased from 1.70% to 1.62%, leading to positive performance in treasury and aggregate bonds.
High yield bonds were slightly positive as broad interest rate decreases furthered the gains experienced from the positive performance in riskier assets.
All indices are currently positive (modestly) for 2016, with high yield bonds leading the way.
Lesson to be learned: Benjamin Graham once said “In the short run, the market is a voting machine, but in the long run it is a weighing machine.” There is a lot of daily market “noise” that can cause unnerving volatility at times, but it is important not to let short-term speculations drive your investment decision making process. Instead, you should 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 decreased from 25.33 to 22.76, 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 remain neutral regarding the stock market direction in the near term (think <18 months).
Weekly Comments & Charts
The S&P 500 finished the week positive as the index attempts to regain positive momentum. Prices stalled during the summer as there had not been a definitive move up or down since the S&P 500 broke through the ceiling set back in May 2015, but the past couple of weeks have seen an increase in price movement. This could indicate an important inflection point in the equity markets. If the S&P 500 continues to use this old ceiling as a level of support, it could signal that markets are experiencing true positive momentum and are ready to continue making new all time highs. However, if the S&P 500 fall below the ceiling, it could signal a decline back into the sideways/downward trading pattern experienced earlier in the year. The coming weeks should give some valuable insight about the near-term direction of the S&P 500.
Broad US equity markets ended positive for the week as the Fed decided to keep rates unchanged in the announcement on Wednesday.
This decision was largely expected as the implied probability of a rate hike going into the meeting was only 15%. The Federal Open Market Committee stated the case for a rate hike has strengthened, but made the decision to wait for further evidence of continued progress before raising rates. Most market participants believe a rate hike will likely happen at the December meeting, if there is to be a rate hike at all in 2016, as the November meeting falls just before the upcoming presidential election.
Future rate hike expectations were further reduced in the September meeting as more committee participants believe there will lower rates for longer. The current projection is that rates will rise to only 1.125% by the end of 2017, compared to the 1.625% estimate from June. Rate projections for 2017 were as high as 1.875% earlier in the year.
Coincident with the lower future rate projections, the Fed decreased its forecast for economic growth in 2016 for the third time this year. The Fed expects GDP to end the year at 1.8%, compared to the 2% expectation in June. Job data has remained mostly positive over the past few months, but inflation continues to run well below the 2% goal. Lower rates should provide some tailwinds for equity markets in the near-term, but the failure of the Fed to increase interest rates illustrates how fragile the current economy may be.
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.
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Source: Phil Calandara