5 Minute Market Update – Holiday Edition

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 positive with international 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 materials are the strongest performers while energy and telecommunications are the only sectors with negative performance year-to-date.

Commodities: Commodities snapped a three-week losing streak as oil prices increased 1.94%. Oil prices continued to be supported by an outage of a North Sea pipeline (which is expected to be operational again by early January) and OPEC production cuts. Gold prices rose 1.72% as the dollar remained suppressed (but steady) following the passage of the new tax bill, helping gold to remain modestly positive with an 11.22% gain YTD. A weaker dollar makes dollar-denominated assets, such as gold, less expensive for holders of other currencies, pushing prices higher.

Bonds: The 10-year treasury yield increased from 2.35% to 2.48%, resulting in negative performance for treasury and aggregate bonds. Yields sharply increased early in the week as tax reform was passed by Congress, resulting in expectations the Fed may hike rates faster than originally anticipated amid stronger economic growth, but steadied to end the week as they neared the psychological level of 2.50%.

High-yield bonds were positive as riskier asset classes performed well during 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.

All indices are currently positive in 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 fifth consecutive week as the Index remains firmly in the upward trend that began in mid-February 2016. Shorter-term momentum has accelerated in recent weeks as the Index has closed at a new all-time high 62 times in 2017, representing the second highest tally of new highs in history (behind the 77 all-times highs recorded in 1995) and 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 378 trading days – the third 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

Broad equity markets were positive for the week as the new US tax bill was signed into law.

President Trump signed the new tax bill into law early Friday morning, marking the largest tax reform experienced in the US in over three decades. While there have been mixed opinions regarding the new tax bill, it is broadly expected to provide a lift to household disposable income and corporate profitability. This is expected to result in stronger US economic growth as corporate earnings should receive a boost from lower tax liabilities. Furthermore, companies may have an incentive to bring cash held overseas back to the US with lower repatriation rates, adding to potential economic growth (companies in the S&P 500 currently hold over $1 trillion in cash overseas).

As investors and companies cheered the news of tax reform, with many companies announcing bonuses and raises for employees as well as committing to increasing company investments, a large amount of economic data was overlooked during the week. Most notably, the final estimate of Q3 2017 GDP showed economic growth of 3.2% on an annualized basis. While this was slightly lower than the 3.3% reported last month, it was still the fastest pace of growth since Q1 2015 and marks the first time since 2014 with two consecutive quarters of 3% or higher GDP growth.

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