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.
Equities: Broad equity markets finished positive for the week week with small-cap stocks experiencing the largest gains. S&P 500 sectors finished the week mixed as defensive sectors generally outperformed cyclical sectors.
So far in 2016 energy, financials, and telecommunications are the strongest performers while healthcare is the only sector with negative performance year-to-date.
Commodities: Commodities were negative for the week, though oil prices rose 2.16%. Oil prices have climbed over 18% since November 30th when OPEC announced that a decision was reached to cut output starting in January 2017. Gold fell 0.30%, marking the seventh consecutive week of losses as the US dollar continued to strengthen.
Bonds: The 10-year treasury yield decreased slightly from 2.60% to 2.55%, leading to positive performance in treasury and aggregate bonds. This is the first week since the election that rates have fallen, though the 10-year treasury yield remains about 55% higher than pre-election levels.
High yield bonds were positive as riskier assets performed well and credit spreads continued to fall.
All indices are currently positive (modestly) for 2016, with small-cap stocks leading the way.
Lesson to be learned: Benjamin Graham once said “The individual investor should act consistently as an investor and not as a speculator.” Nobody can predict the future, but it can be difficult to avoid the urge of speculating about “hot” market topics. Markets often act in ways that are unforeseen which is why it is important to maintain a smart and disciplined investment strategy while avoiding knee-jerk reactions based on daily market noise.
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) has a current reading of 25.44, forecasting further economic growth and not warning of a recession at this time. The Bull/Bear indicator is currently 100% bullish. This means our models believe there is a slightly higher than average likelihood of stock market increases in the near term (within the next 18 months).
Weekly Comments & Charts
The S&P 500 closed mostly flat for the second consecutive week, but remains 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 multiple times in recent weeks. 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.
US equity markets finished positive, but the Dow Jones Industrial Average (DJIA) fell just short of hitting 20,000 for the first time.
The DJIA is currently on a seven week winning streak, but what would the index reaching 20,000 mean for investors? To put things in better perspective, a reading of 20,000 is really only 5.26% higher than the last milestone of 19,000. The DJIA has experienced a monthly movement of over 5.26% on four separate monthly occasions since the beginning of 2015 (17% of the last 23 months, not including December 2016 which is currently up 4.45%), which means 20,000 seems to be just a “hot headline” for news outlets to use in order to attract attention.
Though 20,000 is not necessarily predictive, as it is not notably different than levels of 19,999 or 20,001, it does represent a psychological milestone. Humans tend to be attracted to clean, round numbers because they look nice and have a nice ring to them. Some investors expect that the DJIA reaching 20,000 could signal a continuation of the recent US stock rally. In reality, however, it is more important in the long-term to determine the underlying forces behind the price movements.
US stocks have experienced significant upward pressure since the election, but a major cause of the initial movement was due to speculation over President-elect Trump’s expected policies. Speculation can often cause short and intermediate-term market movements, but over the longer-term market fundamentals generally have more weight than speculation. So what do some of the fundamentals currently look like?
The final Q3 2016 GDP figure showed US economic growth of 3.5%, higher than the preliminary estimate of 2.9% and the second estimate of 3.2%. Consumer spending was the largest contributor as confidence continues to increase due to relatively stable labor market and wage growth. The US unemployment rate fell to 4.6%, the lowest reading since before the 2008 financial crisis. Total S&P 500 earnings (a broader market gauge than the 30 DJIA stocks) grew approximately 3.2% in Q3, marking the first quarter of positive year-over-year earnings growth since Q1 2015.
Though the above information only focuses on a small snapshot of economic data, it illustrates that the US economy appears to be stronger today than it has been over the past couple of years. The recent US economic growth is expected to continue into 2017, but higher interest rates may offset some of the upside potential. However, with the slow and steady path of expected rate hikes moving forward, there is still room for continued economic expansion.
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.