5 Minute Market Update – August 15, 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 negative with small-cap US stocks experiencing the largest losses. S&P 500 sectors finished the week mostly negative as defensive sectors generally outperformed cyclical sectors.

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

Commodities: Commodities were negative for the week as oil prices fell 1.53%. Oil prices have been volatile so far in 2017 as the positive effects of strengthening demand have been conflicting with the negative effects of high global supply. The most recent large move was to the positive side three weeks ago as reports showed US oil and gasoline inventories fell more than expected and Saudi Arabia announced it would further reduce output. Gold prices rose 2.32% amid increasing tensions between the US and North Korea. Gold has been supported by doubts about further near-term rate hikes, a weak dollar, and recent geopolitical uncertainty, leading to a 12.52% gain YTD.

Bonds: The 10-year treasury yield fell from 2.27% to 2.19%, resulting in positive performance for treasury and aggregate bonds.

High-yield bonds were negative as riskier asset classes experienced moderate downward pressure for the week.

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

Lesson to be learned: “Remember that the stock market is a manic depressive.” –  Warren Buffett. Sometimes the market is sensible and prices are based on economic and business developments. However, at other times the market can be emotionally unstable, swinging from euphoria to pessimism in an instant. By sticking to a disciplined investment strategy you can minimize the effect that emotions can have on your portfolio, improving your chances for 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 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 24.69, 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 negative for the week but remains firmly in the upward trend that began in mid-February 2016. Though the current rally has slowed slightly in recent months, short and intermediate-term momentum remains positive as many indices have reached new all time highs multiple times this year, illustrating there may still be further gains ahead. The coming weeks should continue to provide valuable insight about the near-term direction of the S&P 500, but it seems to remain in a bullish pattern for now.

*Chart created at StockCharts.com

The S&P 500 experienced its second-worst week of the year as tensions between the US and North Korea heightened.

Prior to the past week, US stocks had been experiencing an extremely smooth ride this year. The Dow Jones Industrial Average just recently achieved 10 consecutive days of gains (the second time this has happened in 2017) and the S&P 500 Volatility Index had been near historical low levels (recently reaching the lowest levels since 1993). However, broad equity markets traded down on Thursday and volatility spiked as tensions between the US and North Korea escalated.

Throughout the week North Korea threatened to launch missiles near Guam while President Trump stated there would be “fire and fury” if there are any more threats to the United States. These statements sent a sense of restlessness through the markets as investors feared the US and North Korea may be near war, but security officials say the chance of an actual attack on Guam is still very low.

While it may seem stock markets were sharply negative following the increasing political uncertainty, the pullback was not extraordinarily large. Even after a bad week in the markets, the S&P 500 has not experienced a 5% decline from a prior high-water mark since June 27, 2016 (284 trading days). This is the fourth longest streak in history without a 5% correction for the Index.

Broad US stocks were slightly positive on Friday, illustrating markets may already be ready to shrug-off the recent geopolitical risks as long as things do not escalate any further. Generally, as long as there are not further clear reasons for a sell-off (such as an economic slowdown or an actual war ensuing), political tensions are short-lived and end up just becoming a bump in the road. With earnings and job growth remaining strong, the economy seems to remain on solid footing for now.

The recent spike in volatility reminds us why it is important to include a broad range of asset classes in your portfolio for more consistent and more stable longer-term results. Individual stocks, sectors, and indices can go from periods of over-performance to under-performance without a moments notice.

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