5 Minute Market Commetary – August 2, 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, finances should be simple, not complicated.

Market Update

Equities: Broad equity markets finished mixed for the week with large-cap stocks finishing slightly lower while small-cap and international stocks finished higher. Most S&P500 sectors were negative as technology, healthcare, and materials were the only sectors with positive performance for the week.

So far in 2016 telecommunications, utilities, and energy are the strongest performers while financials is the only sector with negative performance.

Commodities: Commodities traded sharply negative for the third time in four weeks as oil lost another 5.86%, falling to below $42 a barrel. Since the recent highs in the beginning of June, oil has dropped about 19% over the past two months. Gold climbed 1.96% and remains significantly positive for the year.

Bonds: The 10-year treasury yield declined for the eighth time in nine weeks, falling from 1.57% to 1.46% (but remaining above the recent lows of 1.37%). Decreasing rates led to positive performance in treasury and aggregate bonds.

High yield bonds were negative as credit spreads increased through the week. The increasing credit spread signaled a slight shift away from riskier debt.

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

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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.

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 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).

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Weekly Comments & Charts

Not much new has happened in the technical world as the S&P 500 snapped a four-week streak of gains but ended mostly flat for the week. The halt in recent momentum is nothing to fear as of now, but it will be important to see if the markets continue the recent positive momentum over the upcoming weeks. Though prices have been trending up recently, trading volume (the number of shares traded during a specified period of time) has been in a slow decline since the beginning of the year. When prices increase and volume decreases, it can be a warning of a potential reversal due to a lack of interest in the market. Price increases (or decreases) on weak volume is not necessarily a strong signal. We would like to see increasing volume accompanying the increasing prices. This would signal that the momentum has officially shifted to a more positive outlook. 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.

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The past week saw many newsworthy updates in the markets; S&P 500 companies continued reporting Q2 2016 earnings, the Q2 2016 U.S. GDP growth rate was announced, and the Federal Reserve released its most recent statement. So far, earnings have been better than expected as 71% of reporting companies have reported earnings above the mean estimate. This is positive news for most companies, but the blended earnings decline for Q2 2016 is still -3.8% (before companies began reporting date, the estimate was a decline of -5.5%). If total S&P 500 earnings do finish negative for Q2 2016, it will mark the first time the index has recorded five consecutive quarters of year-over-year earnings declines since Q3 2008 through Q3 2009.

On a more macro level, U.S. GDP data disappointed as the economy grew only 1.2% on an annualized basis compared to the 2.6% estimate. This suggests the economy is expanding at a slower than expected pace. Consumer spending surged 2.83%, but company investment spending continued to fall.

As we received a mixture of data from earnings and GDP growth, the Fed maintained its “wait and see” policy as rates remained the same. This was the projected outcome for the meeting, but the Fed did display a much more optimistic tone than what was displayed in the June meeting. Job growth was much stronger than expected in June, pointing to potential near-term rate hikes, but inflation remains lackluster which could further delay the Fed’s decision. Many investors expect the Fed to raise rates at least once before the end of the year.

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.


Phil Calandra

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Source: Phil Calandara