5 Minute Market Update – February 14, 2017

Trust Dale CFGMarket Update

Equities: Broad equity markets finished mostly positive for the week with large-cap US stocks experiencing the largest gains. S&P 500 sectors finished the week mostly positive as cyclical sectors generally outperformed defensive sectors.

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

Commodities: Commodities were positive for the week as oil prices remained mostly flat. Speculation regarding OPEC production cuts has pushed oil prices up since late November, but an increase in US production has given investors pause so far in 2017. Gold prices increased 1.30% as gold remains at its highest level since the beginning of November.

Bonds: The 10-year treasury yield fell from 2.49% to 2.41% as treasury and aggregate bonds finished the week positive.

High yield bonds were mostly flat as credit spreads remained relatively stable for the week.

Most indices are currently positive for 2017, with international stocks leading the way.

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Lesson to be learned: Fred Schwed Jr. once said “Speculation is an effort, probably unsuccessful, to turn a little money into a lot. Investment is an effort, which should be successful, to prevent a lot of money from becoming a little.” It can be difficult to avoid the urge of speculating about “hot” stock tips which can allegedly make you rich overnight. The truth, however, is markets often act in ways that are unforeseen. This is why it is important to maintain a smart and disciplined investment strategy while avoiding knee-jerk reactions based on daily market noise.

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).

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Weekly Comments & Charts

The S&P 500 finished the week positive and remains well above the support level that was set following the breakout in July last year. The most recent positive price movement snapped a narrow trading range experienced by the S&P 500, in which the Index had closed within a 1.75% range for 31 consecutive trading days. It appears that US equity markets are currently in an intermediate-term upward trend 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.

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US stock markets began the week on a slightly negative note again, but regained momentum after President Trump announced he would unveil information about his tax plan within the next few weeks.

Trump had been somewhat cautious when addressing the expectation of a tax reform in 2017, but he shifted gears on Thursday when he promised to announce a tax proposal in two to three weeks. Former Goldman Sachs president Gary Cohn is leading the effort to help create President Trump’s plan to restructure taxes. Though specific details about the plan have not yet been released, there is a general understanding of the broad objectives the administration is working towards.

Cohen has stated he is working on two key goals: cutting individual income taxes and cutting corporate income taxes. During his campaign, Trump pushed for a plan that would consolidate the current seven individual income-tax brackets to only three tax brackets, with the top rate being reduced from 39.6% to 33%. Trump also campaigned on a plan to cut the corporate tax rate to 20% and reduce taxes on overseas corporate earnings, resulting in more companies potentially returning money to America rather than keeping profits abroad to avoid paying the large tax liabilities. Under the current US tax law, companies can defer paying income taxes on their offshore profits until they return those profits back to the US.

Investors are becoming increasingly optimistic that lower taxes and higher infrastructure spending may be on the horizon, leading to increased US economic growth, but there are still many hurdles that must be cleared before this becomes a reality. Reforming the tax code is likely to be politically complicated, but the Trump administration seems to be making a major movement to begin the process.

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.


Phil Calandra

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Source: Phil Calandara