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. S&P 500 sectors finished the week mixed as cyclical sectors generally outperformed defensive sectors.
So far in 2016 energy, technology, and utilities are the strongest performers while healthcare is the only sector with negative performance year-to-date.
Commodities: Commodities were slightly positive for the week as oil gained 0.99%. This is the fifth straight week of gains for oil as traders continue to drive up prices on OPEC and Russia production cut speculations. Gold increased 1.02% and remains considerably positive (+19.39%) for the year.
Bonds: The 10-year treasury yield decreased slightly from 1.80% to 1.74%, leading to positive performance in treasury and aggregate bonds.
High yield bonds were positive as credit spreads continued to broadly decline.
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 increased from 22.76 to 25.46, which signaled a slightly negative 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 positive for the week, but remains right at the support level that was set following the breakout in July. 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 few weeks have seen an increase in price movement as markets continue to speculate over interest rates and the upcoming election. 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 falls below the current level of support, 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.
The final presidential debate took place on Wednesday and the markets are turning their attention to the upcoming election on November 8.
Though Clinton seems to be the front-runner for now, there is still much uncertainty surrounding election day. Volatility is likely to remain slightly higher than normal over the coming weeks until the final vote is counted, but what can we expect the markets to do following the election?
If Clinton wins the election, the likely scenario is that equities will continue the recent positive trend into the near future. Clinton’s policies are more clear than Trump’s, as she is expected to continue Obama’s policies, so if Clinton wins there will be less uncertainty in the markets. Some investors fear significant increases to taxation could slow the economy if Clinton wins, but this would likely not be the case as long as Democrats do not control both the Senate and House of Representatives. The higher level of predictability suggests markets would take her victory in stride.
If Trump wins, it is likely that equities would experience an increase in near-term volatility. Trump’s policies are still unpredictable and he has stated there are many foreign and domestic matters he would like to change. Though Trump’s stance on taxes and business could further stimulate the economy in the longer-term, the lower level of predictability suggests market participants may shift towards more safe-haven investments in the near-term if he wins.
While market trends and history are useful for study, there’s always more to investing than just the charts and trends.
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.