5 Minute Market Update – December 11, 2017

I am happy to present this week’s market commentary written by 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 mixed as large-cap US stocks experienced the largest gains and small-cap US stocks experienced losses. S&P 500 sectors finished the week mixed as cyclical sectors generally outperformed defensive sectors.

So far in 2017 technology, healthcare, and financials 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 1.71%, marking the largest weekly loss since early October. Oil prices have pulled back slightly from the recent two-year highs amid concerns that rising US production might offset the OPEC supply cuts which were extended through 2018. Gold prices fell 2.64% as the dollar firmed, though gold remains modestly positive with an 8.56% gain YTD. A stronger dollar makes dollar-denominated assets, such as gold, more expensive for holders of other currencies, pushing prices lower.

Bonds: The 10-year treasury yield increased slightly from 2.37% to 2.38%, resulting in mostly flat performance for treasury and aggregate bonds. Yields have been trending up since early September, but have subsided since President Trump nominated current Fed Governor Jerome Powell as the next Federal Reserve Chair in early November. While rates have somewhat leveled off in recent weeks, many experts expect a rate hike following the December Fed meeting scheduled for this week.

High-yield bonds were flat as credit spreads were little changed for the week. If the economy remains strong and healthy, higher-yielding bonds are expected to continue outperforming aggregate bonds as they offer higher interest payments and the risk of default is moderately low.

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

Lesson to be learned: “If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.” – George Soros. The image that most people have of investing is derived from movies and television shows – investors sitting at their computers, buying and selling every day, and hooting and hollering through the entire process. However, smart investing is much different and less exciting than this. While it can be tempting to chase the next hot trend and speculate with all of your savings, it is important to keep a smart and disciplined investment strategy. By maintaining a broadly diversified blend of assets and eliminating emotions from the investment process when making decisions, you can improve your probability of long-term success and minimize the negative impacts that extreme bear markets can have on your financial well-being.

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 21.10, 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 positive for the third consecutive week, following two weeks of small losses, as the Index remains firmly in the upward trend that began in mid-February 2016. Shorter-term momentum has picked back up in recent weeks as the Index has continued to reach new all-time highs throughout 2017, illustrating there may still be further gains ahead. While volatility and downward pressure have slightly increased, stock markets are still in a historically low risk and volatility environment as there has not been a 5%+ correction for the S&P 500 in 368 trading days – the fourth longest streak in the history of the Index. 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

Investors cheered another strong jobs report, but await the upcoming Fed meeting and further tax reform news as broad markets finished the week mixed.

November was another strong month for the US labor market as payrolls advanced by 228,000 jobs, beating the expected gain of 199,000. Contributing to the positive news, job gains seems to be broad-based across many major industries and the unemployment rate remained at 4.1%, the lowest level in 17 years. This data, which was released on Friday, helped lift markets as there had been a slight downward trend through the earlier part of the week.

As we close in on the end of the year, investors will be keeping an eye on the Fed as well as the tax reform process. The Federal Reserve Board will conclude its final meeting of 2017 on Wednesday, where the committee is widely expected to raise interest rates for the third time this year. While many experts view a rate hike announcement on December 13 as extremely likely, there is much more uncertainty surrounding the likelihood of tax reform passage before the end of 2017. The Senate and House are now working in a conference committee to nail down the key differences between the separately passed bills, with the hopes of securing an agreement on a final tax proposal before Christmas.

Though markets remain strong, it is important to remember the future is largely independent of the past. Broad US stocks have been experiencing strong gains with minimal volatility and virtually no drawdowns so far in 2017. In this environment, it can be easy to forget there are risks to investing. However, it was still less than two years ago (at the beginning of 2016) when the US stock market experienced the worst start to a year in recorded history. This is why it is still important to include a broad range of asset classes in your portfolio for more consistent and more stable longer-term results, rather than chasing “hot” short-term returns.

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