5 Minute Market Update – February 22, 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 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, healthcare, and consumer discretionary are the strongest performers while telecommunications and energy are the only sectors with negative performance year-to-date.

Commodities: Commodities were negative for the week as oil prices fell 0.85%. 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 0.26% as gold remains at its highest level since the beginning of November.

Bonds: The 10-year treasury yield increased slightly from 2.41% to 2.42% as treasury and aggregate bonds finished the week mostly flat.

High yield bonds were positive as riskier assets performed well.

Most indices are currently positive for 2017, with large-cap US 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 experienced gains for the fourth consecutive week and seem to have regained momentum for the time-being.

As US stock markets continue to climb to new highs, a large amount of investor attention remains on interest rates. In her first semiannual testimony to the Senate on monetary policy, Federal Reserve Chair Janet Yellen said the central bank can continue to raise interest rates slowly and it would be “unwise” to wait too long to further increase rates. According to Yellen, delaying rate hikes for too long could potentially result in the Fed increasing rates rapidly in the future, which could disrupt financial markets and push the economy into a recession.

The Fed had previously projected three rate increases in 2017, but many experts project there will only be two increases this year. Yellen declined to specify whether or not there was a possibility for a rate hike in March, as the Fed remains open to adapting to changing economic circumstances as they arise. One key thing the Fed is watching is the fiscal policy promised by the Trump administration, which could accelerate economic growth and inflation faster than expected.

Though the pace of interest rate hikes is still somewhat unclear, it seems there will be further rate hikes throughout 2017, lifting rates from the historically low levels experienced in recent years. The tone of the next Fed meeting, scheduled for March 14 – 15, should give valuable insight to the path of interest rates in the near-term.

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.

Regards,

Phil Calandra

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Source: Phil Calandara