5 Minute Market Update – April 4, 2017

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 the week positive 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 2017 technology, consumer discretionary, and healthcare are the strongest performers while energy and telecommunications are the only sectors with negative performance year-to-date.

 Commodities: Commodities were positive for the week as oil prices rose 5.48%. Oil prices had experienced some recent downward pressure as investors began to fear the current OPEC production cuts may not be enough to reduce global oversupply, but prices spiked following news of support for a potential OPEC production cut extension. Gold prices fell 0.07% for the week, though gold remains moderately positive for the year.

Bonds: The 10-year treasury yield remained at 2.40% with minimal fluctuations throughout the week, resulting in mostly flat performance for treasury and aggregate bonds.

High yield bonds were positive as credit spreads fell and risky assets performed well during the week.

Indices are mostly positive for 2017, with equity markets leading the way while commodities and bonds lag behind.

Lesson to be learned: Paul Samuelson once said “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” Proper investing requires a large amount of patience, which can be difficult for many investors to maintain at times. However, if you create and stick to a disciplined investment strategy, the gains you see over time will become exciting in the long-term.

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 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 finished the week slightly positive and remains well above the support level that was set following the breakout in July last year. Though the index has hit the pause button on the recent rally, short and intermediate-term momentum remains positive as many indices have reached new all time highs multiple times in recent weeks. 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 from 2015 through mid-2016 has shifted to a more bullish pattern for now.

The week of March 20 marked the largest weekly decline in broad US equities since the election, but markets recovered some of these losses during the past week of trading.

As the first quarter came to a close on Friday, it was evident the recent trends experienced since the election remain in place for the time-being. Stocks continued to outperform bonds throughout the quarter, though the gap has closed slightly in recent weeks. In addition, cyclical market sectors continued to generally outperform defensive sectors during the quarter.

While US equity markets remain in a strong up-trend, recent weeks have illustrated a more “normalized” investment environment. Stock markets have experienced a historically low level of volatility since the election, but markets have seen higher levels of fluctuation since mid-March. There is still a large amount of optimism surrounding the outlook for further US economic growth, resulting in further potential gains for stocks, but investors should expect more volatility than what has been experienced since November.

Stocks have been performing extremely well for the past five months with minimal volatility and virtually no drawdowns, but it is still important to include a broad range of asset classes in your portfolio for more consistent and more stable longer-term results.

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

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Source: Phil Calandara