5-Minute Market Update – November 29, 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, investing should be simple, not complicated.

Market Update

Equities: Broad equity markets finished positive for the third straight week week with small-cap stocks experiencing the largest gains. S&P 500 sectors finished the week mostly positive as Healthcare was the only sector with negative performance.

So far in 2016 energy, industrials, and financials are the strongest performers while healthcare is the only sector with negative performance year-to-date.

Commodities: Commodities were positive for the week as oil gained 0.81%. This is the second consecutive week of gains for oil following a three-week decrease of 14.63% on speculation of a surge in global production. Gold fell 2.51% but remains considerably positive at +11.12% for the year.

Bonds: The 10-year treasury yield increased slightly from 2.34% to 2.36% as investors continued speculation of faster US growth and higher inflation following Trump’s presidential election victory, leading to negative performance in treasury and aggregate bonds.

High yield bonds were positive as the increase in broad interest rates was negated by the positive effect of riskier asset gains.

Most indices remain positive (modestly) for 2016, with small-cap stocks leading the way.

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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.

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 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).

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Weekly Comments & Charts

The S&P 500 finished positive for the week and remained well above the support level that was set following the breakout in July. Prior to the presidential election, the S&P 500 had closed negative in four of five weeks, but the market has rebounded sharply and has reached new all time highs. With the recent momentum and upward price pressure, it appears that US equity markets are currently in an intermediate-term upward trend. 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 since mid-2015 has shifted to a more bullish pattern for now.

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US equity markets finished positive for the third straight week as stocks continued to rally following the election.

Small-cap US stocks (as measured by the Russell 2000) have experienced gains in for 15 consecutive days, the longest winning streak since February 1996. Over this time period the Russell 2000 is up over 16%. Many experts believe this could be a sustainable rally over a longer-term basis as Monday saw 25% of small-cap companies hit a new 52-week high which is the highest one-day reading since 1995. This wide level of breadth generally indicates a robust expansion that can continue into the future.

Though small-cap stocks have been outperforming larger stocks, all US equity indices have experienced a strong run since the presidential election. The Dow Jones Industrial Average, the S&P 500, and the NASDAQ set new all-time highs as well this past week. This recent run-up is mostly the result of speculation surrounding Trump’s policies leading to stronger US economic growth, but can it continue past the end of 2016?

So far, 98% of companies in the S&P 500 have reported earnings for Q3 2016. This will be the first time in six quarters the index has seen year-over-year growth in earnings. US GDP has also picked up momentum after a string of week data, growing at the fastest rate since Q3 2014. These are positive signs for continued US equity growth, but there are still some headwinds to be aware of. The price-to-earnings ratio for the S&P 500 is still relatively high compared to the trailing 10-year average. There is also the risk that the Fed could increase interest rates faster than expected, which could slow the current momentum in the economy. Though US stocks appear to be on track to continue outperforming through the end of 2016, it is important to include other broad asset classes in your portfolio for more consistent longer-term results.

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.

Regards,

Phil Calandra

FormulaFolios Portfolio Recap – November 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 – November 22, 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, investing should be simple, not complicated.

Market Update

Equities: Broad equity markets finished mostly positive for the week with small-cap stocks experiencing the largest gains. S&P 500 sectors finished the week mixed with cyclical sectors generally outperforming defensive sectors.

So far in 2016 energy, financials, and industrials are the strongest performers while healthcare and consumer staples are the only sectors with negative performance year-to-date.

Commodities: Commodities were positive for the week as oil gained 5.25%. Oil prices had decreased 14.63% over the previous three weeks on speculation of an increase in global production. Gold fell 1.23%, its first decline in five weeks, but remains considerably positive at +13.98% for the year.

Bonds: The 10-year treasury yield increased sharply from 2.15% to 2.34% as investors continued speculation of faster US growth and higher inflation following Trump’s presidential election victory, leading to negative performance in treasury and aggregate bonds.

High yield bonds were positive as the increase in broad interest rates was negated by the positive effect of riskier asset gains.

Most indices remain positive (modestly) for 2016, with small-cap stocks leading the way.

screen-shot-2016-11-21-at-8-46-37-am

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.

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 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).

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Weekly Comments & Charts

The S&P 500 finished positive for the week and remained above the support level that was set following the breakout in July. Prior to last week, the S&P 500 had closed negative in four of five weeks, but markets rebounded sharply following the presidential election results. Thus, we remain at an important inflection point in the equity markets. If the S&P 500 turns this level of support back into a level of resistance, it could signal a decline back into the sideways/downward trading pattern experienced earlier in the year. However, if the index maintains its positive momentum and reaches a new all time high, it could signal a more definitive continuation of the bull market conditions experienced since early 2009. The coming weeks, especially now that the election has passed, should give some valuable insight about the near-term direction of the S&P 500.

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US equity markets finished positive for the second straight week as stocks continued to rally following the election.

Small-cap US stocks have lead the way following the election, experiencing gains of over 10%. The S&P 500 is up over 2% since the election and is just below its all time high. This is positive news for US stocks as investors speculate about how Trump’s policies may lead to stronger economic growth, but how have other major asset classes been performing post-election?

Emerging markets have declined over 7% as many investors fear rising tariffs and a more-strict trade policy between the US and other countries could damage the economic health of these countries. Developed international stocks are down over 2% with continuing uncertainty surrounding the Eurozone. Real estate is down over 2% and 20-year treasuries are down over 7% as interest rates continue to climb.

Though it may be tempting to make portfolio changes based on these short-term “trends”, it is important to maintain a disciplined investment policy. US stocks have been performing extremely well relative to other markets since 2009, but this will likely not be the case forever. It is important not to lose sight of other asset classes. Every market cycle will have asset classes that outperform and asset classes that underperform; including a broad group of asset classes in your portfolio can lead to lower risk and more consistent returns over the long-run.

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.

Happy Thanksgiving and Safe Travels!

Regards,

Phil Calandra

5-Minute Market Commentary – November 15, 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, investing should be simple, not complicated.

Market Update

Equities: Broad equity markets finished positive for the week with small cap 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, industrials, and financials are the strongest performers while healthcare and consumer staples are the only sectors with negative performance year-to-date.

Commodities: Commodities were negative for the week as oil fell 1.50%. This is the third consecutive weekly decline for oil since as traders continue to speculate that there may be an increase in global production if no OPEC production cut deal is reached. Gold fell 6.12%, its first decline in five weeks, but remains considerably positive at +14.82% for the year.

Bonds: The 10-year treasury yield increased sharply from 1.79% to 2.15% as investors began speculation of faster US growth and higher inflation following Trump’s presidential election victory, leading to negative performance in treasury and aggregate bonds.

High yield bonds were negative as the positive effect riskier asset gains were negated by the increase in broad interest rates.

Most indices remain positive (modestly) for 2016, with small-cap US stocks leading the way.

screen-shot-2016-11-14-at-9-16-16-am

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.

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 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).

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Weekly Comments & Charts

The S&P 500 finished positive for the week and closed above the support level that was set following the breakout in July. Prior to this week, the S&P 500 had closed negative in four of the past five weeks, but markets rebounded sharply following the presidential election results. Thus, we remain at an important inflection point in the equity markets. If the S&P 500 turns this level of support back into a level of resistance, it could signal a decline back into the sideways/downward trading pattern experienced earlier in the year. However, if the index regains the positive momentum it had experienced starting in February, it could signal the markets are ready to continue making new all-time highs. The coming weeks, especially now that the election has passed, should give some valuable insight about the near-term direction of the S&P 500.

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US equity markets finished positive for the week as the S&P 500 recorded its largest weekly gain since October, 2014. These gains follow a streak of nine consecutive days of declines for the S&P 500, the longest streak since 1980.

As the presidential election results poured in late Tuesday night, it became more and more apparent that Donald Trump was about to become the 45th President of the United States. As Wall Street and the markets digested this information, major US equity index futures traded down as much as 5% lower from the previous close. It was widely expected that equity markets would face some downward pressure and increased volatility in the near-term following a Trump victory as his specific policies are largely unpredictable, but equities rebounded for a strong rally finishing positive over 1% on Wednesday.

Though US equities ended the week on a positive note, global markets did not fare so well as most asset classes ended the week negative. Investors drove up interest rates on speculation of higher US economic growth and higher inflation rates, hurting bonds and real estate (20-year treasuries fell 7.36% and real estate fell 0.93% for the week). Commodities were also negative as gold and oil fell in reaction to higher interest rates and a stronger dollar. Even international equities didn’t experience the positive bounce experienced by US equities as developed markets finished up by less than 1% and emerging markets fell almost 4%.

Compared to the S&P 500 and other US equity markets, a broadly diversified portfolio would not have fared too well last week. However, it is important not to speculate about what might happen over a short period of time, but rather stay focused on longer-term trends. US equities have performed extremely well since the beginning of 2009, but a look at the charts below illustrate why it important not to lose focus on including asset classes outside of US equities in your portfolio:

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In the most recent bull market (top chart), the S&P 500 trails real estate but is significantly beating international equities. However, in the bull market from 2003 – 2007 (bottom chart), the S&P 500 significantly underperformed other major growth asset classes.

It is also important to remember markets do not go up all of the time. A look at the graph below can serve as a reminder that buy-and-hold strategies have the potential for devastating losses when markets turn sour:

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Combining multiple asset classes with tactical management can provide the potential for favorable returns over full market cycles. Every market cycle will have asset classes that outperform and asset classes that underperform. Various investment strategies will have numerous periods of ups and downs as well. By sticking to a disciplined investment strategy over a long period of time, investors can take advantage of major market trends. Though it is impossible to predict the markets with 100% accuracy, minimizing losses and not panicking when portfolios have modest short-term fluctuations is key to long-term success.

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.

Regards,

Phil Calandra

Trump Wins Presidential Election – What Now?

Donald Trump will be the 45th President of the United States as Hillary Clinton conceded the election early Wednesday morning. This was a largely unexpected outcome as most pre-election surveys indicated a slight advantage for Clinton in the months leading up to the election. Wall Street projected a Clinton victory as well because her policies were considered more stable and she represented the status quo. Broad US equity indices gained 2.5%+ with the expectations of a Clinton presidency priced in, but as results poured in throughout the evening the markets quickly shifted.

US stock index futures began to plummet late Tuesday night as it became more and more apparent that Trump was nearing the 270 electoral votes needed for a victory. With the election still up in the air, Dow Jones Industrial Average (DJIA) futures were trading down over 900 points (5% down from the previous close). Losses were pared, however, after Trump gave an establishment-style victory speech early Wednesday morning, helping relieve some anxiety in the markets. DJIA futures are currently down only 250 points (less than 1.5% down from the previous close) heading into the opening of trading today.

Many investors are already comparing this to the UK’s historic Brexit decision. The markets underestimated the probability of an outcome that appeared unlikely, and experienced an initial panic immediately following the result. Immediately following the Brexit decision, US equity markets fell between 4.5% to 7%. After the initial shock wore off and investors had time to digest the outcome, markets rebounded sharply and proceeded as usual.

Historically, US equity indices swing an average of 1.5% the day following the election results. A 250 point DJIA drop as projected by current futures would fall within this normal trading range. In the 22 elections since 1928, the S&P 500 has fallen 15 times the day following the election for an average loss of 1.8%. It is also important to realize that the movement of the market in the first trading day following an election predicts the market’s direction over the next 12 months less than 50% of the time.

Though markets are set to open lower today and are expected to experience a volatile period in the coming weeks, we believe our strategies are well-positioned for success in both the short-term and long-term:

  • Tactical Growth currently has a 33% position in gold, which is considered a safe-haven asset and a strong hedge against volatile equity markets.
  • Flexible Growth is currently allocated in treasury bonds rather than equities.
  • BCA is currently 100% in cash at the moment and Redwood is 100% invested in high yield bonds.
  • FFI US Equity has been slowly increasing equity exposure through the year which is beneficial if markets rally following a short sell-off, but still maintains a sizable cash position.

This is a perfect example of why it is so important to keep a disciplined investment strategy over a long period of time. Various markets and various investment strategies will have numerous periods of ups and downs over any given time period. The markets are unpredictable and at times unstable. This is why we should not make knee-jerk decisions based on emotions and short-term information, but rather stay focused on our long-term investment objectives.

Regards,

Phil Calandra

5-Minute Market Update | November 7, 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, investing should be simple, not complicated.

Market Update

Equities: Broad equity markets finished negative for the week with international stocks experiencing the largest losses. All S&P 500 sectors finished the week negative.

So far in 2016 energy, utilities, and technology are the strongest performers while healthcare and consumer discretionary are the only sectors with negative performance year-to-date.

Commodities: Commodities were negative for the week as oil fell 9.51%. This is the largest weekly decline for oil since January as traders speculated there may be an increase in global production if no OPEC production cut deal is reached in November. Gold increased 2.18%, marking the fourth straight week of gains.

Bonds: The 10-year treasury yield decreased from 1.86% to 1.79%, leading to positive performance in treasury and aggregate bonds.

High yield bonds were negative as the positive effect of broad interest rate decreases were negated by the negative performance in riskier assets.

Most indices remain positive (modestly) for 2016, with high yield bonds leading the way.

screen-shot-2016-11-07-at-8-44-36-am

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.

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 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).

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Weekly Comments & Charts

The S&P 500 finished negative for the week and closed well below the support level that was set following the breakout in July. With investor anxiety and uncertainty increasing heading into the election, the S&P 500 has closed negative in four of the past five weeks. This could indicate an important inflection point in the equity markets. If the S&P 500 turns this level of support back into a level of resistance, it could signal a decline back into the sideways/downward trading pattern experienced earlier in the year. However, if the index regains the positive momentum it had experienced starting in February, it could signal the markets are ready to continue making new all-time highs. The coming weeks, especially following the election, should give some valuable insight about the near-term direction of the S&P 500.

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Equity markets finished negative for a second straight week as the S&P 500 has recorded nine consecutive days of declines, the longest streak since 1980.

The recent negative trend seems to be driven by investor anxiety surrounding the upcoming election as economic data continues to be mostly positive. US GDP grew 2.9% on an annualized basis, the highest growth rate since Q3 2014. Friday’s job report revealed the economy added 161,000 jobs in October, showing the labor market continues to grow at a solid pace. Wages have increased 2.8% year-over-year, the fastest growth rate since 2009. Earnings growth is on track for its first positive quarter since Q4 2014.

Generally, this type of data would lead to rising equity prices, but prices have continued lower and volatility has increased as the election draws near. This illustrates how fragile and irrational the markets can be at times as it is apparent that the uncertainty surrounding the election has completely overtaken market fundamentals. The S&P 500 is only about 6% off its all-time high reached in August however, so there is the potential for higher prices based on recent fundamental data after the election passes.

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.

Regards,

Phil Calandra

The Markets Have Been Trending Downward Since August – Is It Time To Head For The Exit?

bull bearAs many have noticed, broad markets have been trending down since mid-August, but most indices remain modestly positive for the year. Markets had been in an uptrend since February, but virtually nothing has performed well over the past couple of months – equities, bonds, commodities, and real estate are all negative over this time period.

YTD

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Mid-August – Current

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So far, 2016 has been a unique year for investing. The year began with the worst start in US stock market history, followed by a sharp rebound in mid-February pushing equities positive by March. Just as markets seemed to be on a roll, the UK voted to leave the European Union, triggering a broad decline in June. However, investors rallied for a second time this year and the S&P 500 made new all-time highs in July. The rest of the summer saw the narrowest trading range in the history of the S&P 500 dating back to 1928.

Since mid-August, there has been a lot of anxiety surrounding the upcoming election, which led to an increase in market volatility and downward pressure for equity prices. Increased speculation about a Fed rate hike before year-end has added to the recent volatility, and has hurt bond markets and real estate as broad market rates have been increasing. Does this mean it is time to head for the exits, or will markets rebound as they have multiple times this year?

Though it is impossible to predict the market with 100% accuracy, it does not appear that markets are going to spiral into another 2008-type crash just yet. Our Recession Probability Index is currently at 25.46, indicating the US economy is still generally in an expansion phase (we like to see this under 50). The Bull/Bear indicator is currently 50% bullish and 50% bearish, meaning our models maintain a neutral stance regarding the stock market direction in the near-term (within the next 18 months). Six of the seven Smart Passive model indicators remain positive. US GDP grew at the fastest rate in two years in Q3 2016.

These indicators show that this may be just another short-term market pullback, which appears more severe due to the anxiety over the upcoming election. Below is a chart illustrating monthly returns of the S&P 500 index dating back to 2000. The downward movement the index has experienced since August is relatively small compared to years such as 2000-2002 and 2008. Even in a bull market, years such as 2010, 2011, 2012 and 2015 show that there may be short-term corrections during a long-term bull market. Markets will fluctuate over time; a couple of negative months – especially months with relatively mild declines – do not necessarily foreshadow a severe correction or downturn.

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This does not mean investors should flock to entirely risky assets, however. While it may be tempting to adjust a strategy based on short-term market movements, it is important to maintain a portfolio focused on long-term growth rather than speculating over what may happen week-to-week. Holding a mixture of equities, fixed-income, commodities, and real estate, and utilizing a tactical management style to react to broad market movements, can position an investor for long-term success regardless of the short-term market noise.

This year has been a perfect example of why it is so important to keep a disciplined investment strategy over a long period of time. Various markets and various investment strategies will have numerous periods of ups and downs over any given time period. The markets are unpredictable and at times unstable. This is why we should not make knee-jerk decisions based on emotions and short-term information, but rather stay focused on our long-term investment objectives.

More to come soon.  Stay tuned.

Regards,

Phil Calandra

5-Minute Market Update | November 1, 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, investing should be simple, not complicated.

Market Update

Equities: Broad equity markets finished mostly negative for the week with small-cap stocks experiencing the largest losses. S&P 500 sectors finished the week mixed as defensive sectors generally outperformed cyclical sectors.

So far in 2016 energy, utilities, and technology are the strongest performers while healthcare and consumer discretionary are the only sectors with negative performance year-to-date.

Commodities: Commodities were negative for the week as oil fell 4.23%. This is the first week of losses for oil since mid-September as traders had been driving up prices amid OPEC and Russia production cut speculations. Gold increased 0.76%, marking the third straight week of gains.

Bonds: The 10-year treasury yield increased from 1.74% to 1.86%, leading to positive performance in treasury and aggregate bonds.

High yield bonds were negative as broad interest rate increases added to losses experienced from the negative performance in riskier assets.

All indices are currently positive (modestly) for 2016, with high yield bonds leading the way.

screen-shot-2016-10-31-at-9-10-19-am

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.

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 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).

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Weekly Comments & Charts

The S&P 500 finished negative for the week and 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 couple months 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.

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Equity markets finished mostly negative as investors shrugged-off a positive GDP report on Friday and kept attention on the upcoming Fed meeting and presidential election.

US GDP growth rebounded in Q3 2016 after three quarters of weak data as the economy grew 2.9% on an annualized basis compared to the 2.5% estimate. This is the highest growth rate since Q3 2014. Consumer spending was the largest contributor as the labor market and wage growth remain relatively strong.

Though a positive GDP report would generally be thought to push equity prices higher, markets continued lower on Friday and finished the week negative as a large amount of anxiety remains around the upcoming Fed meeting and presidential election.

The Federal Open Market Committee will issue its next statement regarding interest rates and monetary policy this Wednesday. Though the case for rate hikes has strengthened recently, most market participants do not expect any rate hikes before December as it seems unlikely rates would be increased a week before the election. While the implied probability of a rate hike in the upcoming November meeting remains low at only 6.2%, volatility is expected to remain present in the markets until election day is in the past.

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.

Regards,

Phil Calandra